ࡱ>  y bjbj E{{WS[ ++9\`AMMM0N0N0N(OQ0NrTZD[(l[l[- 9|U=$N*-M?,^-??FFl[l[7,TTT?dFl[Ml[T?TTF_Kl[0? TB0rg*Kl*~*M)?)?T7? C?T???#Pl???r????*?????????+ 7:  Variation of NBNCo Special Access Undertakingexplanatory statement October 2013 Australian Competition and Consumer Commission 23 Marcus Clarke Street, Canberra, Australian Capital Territory, 2601 First published by the ԭ 2013 10987654321 Commonwealth of Australia 2013 This work is copyright. In addition to any use permitted under the Copyright Act 1968, all material contained within this work is provided under a Creative Commons Attribution 3.0 Australia license, with the exception of the Commonwealth Coat of Arms and the ԭ logo. The details of the relevant license conditions are available on the Creative Commons website, as is the full legal code for the CC BY 3.0 AU license. Requests and inquiries concerning reproduction and rights should be addressed to the Director Publishing, ԭ, GPO Box 3131, Canberra ACT 2601, or  HYPERLINK "mailto:publishing.unit@accc.gov.au" publishing.unit@accc.gov.au. Important notice The information in this publication is for general guidance only. It does not constitute legal or other professional advice, and should not be relied on as a statement of the law in any jurisdiction. Because it is intended only as a general guide, it may contain generalisations. You should obtain professional advice if you have any specific concern. The ԭ has made every reasonable effort to provide current and accurate information, but it does not make any guarantees regarding the accuracy, currency or completeness of that information. Parties who wish to re-publish or otherwise use the information in this publication must check this information for currency and accuracy with the ԭ prior to publication. This should be done prior to each publication edition, as ԭ guidance and relevant transitional legislation frequently change. Such queries should be addressed to the Director Publishing, ԭ, GPO Box 3131, Canberra ACT 2601, or  HYPERLINK "mailto:publishing.unit@accc.gov.au" publishing.unit@accc.gov.au. www.accc.gov.au Contents  TOC \o "1-2" \f \h \z  HYPERLINK \l "_Toc368942481" Glossary  PAGEREF _Toc368942481 \h 2  HYPERLINK \l "_Toc368942482" Preface  PAGEREF _Toc368942482 \h 6  HYPERLINK \l "_Toc368942483" 1. Background to Notices to Vary  PAGEREF _Toc368942483 \h 8  HYPERLINK \l "_Toc368942484" 2. Interaction between the SAU and the telecommunications access regime  PAGEREF _Toc368942484 \h 10  HYPERLINK \l "_Toc368942485" 2.1. Relationship between Standard Forms of Access Agreement, the SAU and regulatory determinations  PAGEREF _Toc368942485 \h 10  HYPERLINK \l "_Toc368942486" 2.2. Conduct about the development of SFAAs (Multilateral SFAA forum)  PAGEREF _Toc368942486 \h 12  HYPERLINK \l "_Toc368942487" 2.3. Conduct about submitting variations to the SAU (Replacement Modules)  PAGEREF _Toc368942487 \h 13  HYPERLINK \l "_Toc368942488" 3. Services to which the SAU relates  PAGEREF _Toc368942488 \h 16  HYPERLINK \l "_Toc368942489" 3.1. Uncertainty in relation to the ԭ's ability to set terms and conditions  PAGEREF _Toc368942489 \h 16  HYPERLINK \l "_Toc368942490" 3.2. Product component bundling  PAGEREF _Toc368942490 \h 17  HYPERLINK \l "_Toc368942491" 4. Product development, product withdrawal and reference offers  PAGEREF _Toc368942491 \h 19  HYPERLINK \l "_Toc368942492" 4.1. Product development and variation  PAGEREF _Toc368942492 \h 19  HYPERLINK \l "_Toc368942493" 4.2. Product withdrawal and reference offers  PAGEREF _Toc368942493 \h 27  HYPERLINK \l "_Toc368942494" 5. Maximum Regulated Prices  PAGEREF _Toc368942494 \h 32  HYPERLINK \l "_Toc368942495" 5.1. Overarching issues  PAGEREF _Toc368942495 \h 33  HYPERLINK \l "_Toc368942496" 5.2. Initial Maximum Regulated Price setting  PAGEREF _Toc368942496 \h 36  HYPERLINK \l "_Toc368942497" 5.3. Changes to Maximum Regulated Prices over time  PAGEREF _Toc368942497 \h 48  HYPERLINK \l "_Toc368942498" 6. Long-term revenue constraint  PAGEREF _Toc368942498 \h 62  HYPERLINK \l "_Toc368942499" 6.1. Overarching issues with the long-term revenue constraint methodology  PAGEREF _Toc368942499 \h 63  HYPERLINK \l "_Toc368942500" 6.2. Long-term revenue constraint methodology in Module 1  PAGEREF _Toc368942500 \h 71  HYPERLINK \l "_Toc368942501" 6.3. Long-term revenue constraint methodology in Module 2  PAGEREF _Toc368942501 \h 82  HYPERLINK \l "_Toc368942502" 7. Non-price terms and conditions  PAGEREF _Toc368942502 \h 89  HYPERLINK \l "_Toc368942503" 7.1. Dispute management  PAGEREF _Toc368942503 \h 89  HYPERLINK \l "_Toc368942504" 7.2. POI-related matters  PAGEREF _Toc368942504 \h 90  HYPERLINK \l "_Toc368942505" 7.3. Retail-level regulatory requirements  PAGEREF _Toc368942505 \h 91  HYPERLINK \l "_Toc368942506" 8. Fixed Principles  PAGEREF _Toc368942506 \h 92  HYPERLINK \l "_Toc368942507" Attachment A: Price re-balancing process  PAGEREF _Toc368942507 \h 95  HYPERLINK \l "_Toc368942508" Attachment B: ԭ assessment of capital expenditure in Module1  PAGEREF _Toc368942508 \h 97  HYPERLINK \l "_Toc368942509" Attachment C: ԭ assessment of operating expenditure in Module 1  PAGEREF _Toc368942509 \h 98  HYPERLINK \l "_Toc368942510" Attachment D: NBN Co proposed minor variations  PAGEREF _Toc368942510 \h 99  HYPERLINK \l "_Toc368942511" Contacts  PAGEREF _Toc368942511 \h 100  Glossary Access Agreements An agreement between a carrier (access provider) and an access seeker for the supply of declared services. The requirements for a legally valid Access Agreement are set out in section 152BE of the Competition and Consumer Act 2010. Access Determinations Written determinations made by the ԭ relating to terms and conditions for access to a declared service. Access seeker A content service provider or carriage service provider that makes, or proposes to make, a request to NBN Co for access to its services, as defined in section 152AG of the Competition and Consumer Act 2010. Ancillary Services NBN Co defines this as the services supplied by NBN Co that facilitate the supply of the NBN Access Service, but excludes the Facilities Access Service. Annual revenue requirements The amount of revenue that NBN Co would be required to earn to recover its costs in a particular year. Over the SAU term, the annual revenue requirements will provide NBN Co an opportunity to recover all of its costs. ԭ Australian Competition and Consumer Commission. AER Australian Energy Regulator. AVC (Access Virtual Circuit) An Ethernet-based Layer 2 virtual connection that carries traffic to and from an end-user on NBN Cos fibre, wireless, or satellite networks. Binding Rules of Conduct Written rules made by the ԭ specifying any or all terms and conditions for compliance with Standard Access Obligations or requiring compliance with any or all applicable Standard Access Obligations in a manner specified in the rules. These rules are made when there is an urgent need to do so. Building block model A methodology used to calculate NBN Cos annual revenue requirements. Building block revenue period The period of the SAU term during which NBN Cos prices will be set to recover its annual revenue requirements. This period follows the initial cost recovery period. Carriage service This is defined in section 7 of the Telecommunications Act 1997 as a service for carrying communications by means of guided and/or unguided electromagnetic energy. CCA Competition and Consumer Act 2010. CPI Consumer Price Index. Customer NBN Co defines this as a carrier or carriage service provider that has entered into, or is otherwise subject to, an Access Agreement with NBN Co. CVC (Connectivity Virtual Circuit) NBN Co defines this as an Ethernet-based Layer 2 virtual capacity for the transport of customer traffic from multiple end-users within a Connectivity Serving Area on an aggregated basis and presented at the Network-Network Interface at the point of interconnect associated with that Connectivity Serving Area (CSA). Data rate The number of binary bits per second of data passing through an interface during a given time. Draft Decision A document published on 4 April 2013 that contained the ԭs preliminary views on the 18 December 2012 SAU. Draft Notice to Vary A document published on 4 July 2013 that contained the ԭs proposed variations to the 18 December 2012 SAU. Eligible service This is defined in section 152AL of the Competition and Consumer Act 2010 as a listed carriage service or a service that facilitates the supply of a listed carriage service where the service is supplied or capable of being supplied by a carrier or carriage service provider (whether to itself or to other persons). Facilities Access Service Described by NBN Co as a service that enables a customer to install, operate and maintain its telecommunications equipment at or near a point of interconnect for the purpose of interconnecting its network with the NBN Co network. Initial cost recovery account NBN Co describes this as the account used to accumulate any initial unrecovered costs. Initial cost recovery period The initial period of the SAU term during which NBN Co will accumulate unrecovered costs, and then recover these costs as demand increases. NBN Co will be allowed to earn more revenue than allowed by its annual revenue requirements to recover these accumulated costs. Initial Product Roadmap NBN Co describes this as the document titled Initial Roadmap July 2012, version 2 published on NBN Cos website. Layer 2 bitstream A point-to-point data stream with defined interface protocol. It is independent of the underlying network technology and the services running over it. Listed carriage service A carriage service of the type listed in section 16 of the Telecommunications Act 1997, that is, a carriage service between two points where at least one point is in Australia. Long-term revenue constraint methodology (LTRCM) The methodology for determining the amount of revenue NBN Co would be able to earn via its prices over the SAU term. The key components are annual revenue requirements, a regulatory asset base and the initial cost recovery account. Multicast service A service which enables content to be transmitted simultaneously to multiple parties, but is carried as a single stream as far into the network as possible. Multilateral SFAA forum A multilateral forum established by NBN Co to consult with industry on changes to the terms and conditions of SFAAs. NBN Access Service NBN Co describes this as a Layer 2 service supplied on the NBN Co network between and including: a User Network Interface on a Network Termination Device; and the Network-Network Interface at the point of interconnect associated with the relevant Network Termination Device, for the purpose of enabling an access seeker or another service provider that is a customer of an access seeker to supply carriage or content services. NBN Co NBN Co Limited and NBN Tasmania Limited. Network Design Rules The document that describes the design of NBN Cos fibre, wireless and satellite networks. This document has a role in determining the amount of capital and operating expenditure that NBN Co may recover via the SAU. Network Termination Device (NTD) The device on the customer end of an access network used to send and receive signals sent across the physical access medium. NNI (Network-Network Interface) A physical interface between the NBN Co network and the access seekers network at the point of interconnect. Non-reference Offer All of NBN Cos products that are not defined as reference offers or other charges. Notice to Vary A written notice given to NBN Co under section 152CBDA of the CCA that invites NBN Co to make variations to the SAU in accordance with the notice. Other charge NBN Co defines this as an ancillary charge associated with the supply of a product component, product feature, Ancillary Service or type of Facilities Access Service. PDF Processes The provisions of Annexure 1 to Schedule 1I of the SAU. These provisions describe how NBN Co will engage with customers via the Product Development Forum on the development and withdrawal of products. POI (point of interconnect) The geographical point where traffic stops being carried on the network of the access seeker and is given to the network owned by NBN Co to carry. Product components These are the UNI, AVC, CVC, NNI, and any new or varied product components introduced by NBN Co pursuant to the product development provisions in the SAU or any new or varied product components introduced by NBN Co that are Initial Products or Licence Condition Products. Product Development Forum (PDF) NBN Co describes this as the primary forum through which customers may submit new product ideas, provide input on the development of new and existing products, and obtain information from NBN Co on its current and future product offerings. Product features NBN Co defines these as the features of a product component that are made available by NBN Co and which are selectable and configurable by the customer in respect of that product component (for example, data transfer rate or traffic class associated with an Access Virtual Circuit). RAB (Regulatory Asset Base) Represents the value of capital investments made by NBN Co that it can recover via prices over the SAU term. Reference Offer NBN Cos entry-level residential and business grade offers, designed to include all products reasonably necessary to provide a service to end-users over the NBN. Regulatory Determination A term used in the SAU to mean either an Access Determination or a Binding Rule of Conduct. Response to Submissions A document published on 4 July 2013 that provided the ԭs reasons for the proposed variations contained in the draft Notice to Vary, and the ԭs response to submissions on the Draft Decision on the 18 December 2012 SAU and the Consultation Paper on the Notice to Vary the SAU. SAU (Special Access Undertaking) A voluntary undertaking given to the ԭ by a supplier of a telecommunications service specifying the terms and conditions upon which it agrees to supply a listed carriage service or a service which facilitates the supply of a listed carriage service. SAU term Refers to the term of NBN Cos Special Access Undertaking. This term commences when the Special Access Undertaking is accepted by the ԭ and ends on 30 June 2040. Standard Business Offer (SBO) NBN Co defines this as its entry-level business grade service, including an AVC (25/10 Mbps, Traffic Class 4), a UNI-D and an optional UNI-V. Standard Form of Access Agreement (SFAA) A document published on the NBN Co website which sets out terms and conditions on which NBN Co is obliged to enter into in an Access Agreement with an access seeker upon request, and declares the services to which it relates. Statement of Expectations A statement initially released by the Australian Government on 17 December 2010, and any subsequent variations, which sets out the Governments expectations for NBN Co in implementing the NBN policy. UNI (User-Network Interface) The physical interface where the end-users equipment connects to NBN Cos network, either a data port (UNI-D) or a voice port (UNI-V). WACC (Weighted Average Cost of Capital) A method for calculating the minimum required cost of capital for a company. This method is calculated by using a weighted average of the costs of the sources of funding for a company. Wholesale Broadband Agreement (WBA) The WBA sets out comprehensive price and non-price terms in relation to the supply of NBN Cos services; and the processes for providing NBN Cos customers with operational and technical information in relation to those services. The WBA is a Standard Form of Access Agreement. Preface NBN Co Limited and NBN Tasmania Limited (NBN Co) lodged a Special Access Undertaking (the SAU) with the Australian Competition and Consumer Commission (the ԭ) pursuant to section 152CBA in Division 5 of Part XIC of the Competition and Consumer Act 2010 (CCA) on 18 December 2012. The SAU specifies matters relating to the supply of what NBN Co terms the NBN Access Service and the Ancillary Services. It also specifies commitments relating to the Facilities Access Service. On 4 April 2013, the ԭ released a Draft Decision setting out its preliminary view that it is not satisfied that the SAU lodged by NBN Co on 18December 2012 meets the criteria specified in Part XIC of the CCA for acceptance of an SAU. The ԭ is giving NBN Co a notice specifying variations to the SAU (Notice to Vary). This notice is given in order to facilitate NBN Co being able to lodge a varied SAU that is capable of meeting the statutory criteria. On 4 April 2013, the ԭ released a Consultation Paper which sought views on the variations to the 18 December 2012 SAU that the ԭ was proposing to include in a Notice to Vary to be given to NBN Co. On 4 July 2013, the ԭ released for consultation a draft of the Notice to Vary. Submissions to these processes can be found on the ԭs website, along with information about how to access confidential submissions. The ԭ has taken into account submissions received from interested parties to both of these processes in developing the Notice to Vary which this Explanatory Statement accompanies. This Explanatory Statement provides an explanation of the key changes that have been made to the draft Notice to Vary in finalising the notice, and the reasons why certain key amendments proposed by interested parties (including NBN Co) were not adopted. This document should be read in conjunction with the Response to Submissions released with the draft Notice to Vary. The notice that the ԭ is giving to NBN Co is attached to this document. As noted in the Response to Submissions accompanying the draft Notice to Vary, a number of features of the SAU lodged by NBN Co on 18 December 2012 are proposed to be retained. On the other hand, variations are proposed in relation to the operation of the SAU and its interaction with the Part XIC telecommunications access regime, as well as to price and non-price terms. The overarching intent of proposing that the SAU be varied in the manner set out in the notice is set out in chapter 1 of the Response to Submissions accompanying the draft Notice to Vary. The Notice to Vary also includes minor non-material variations proposed by NBN Co in its submissions to the Consultation Paper on the Notice to Vary and to the draft Notice to Vary. For convenience and clarity, the Notice to Vary is in the form of a marked-up version of the 18December 2012 SAU. Next Steps NBN Co has the time specified by the ԭ in the Notice to Vary to respond to the notice by lodging a varied SAU. The time specified by the ԭ is the period commencing 8 October 2013 and ending 19 November 2013. This does not preclude NBNCo from lodging a varied SAU prior to the end of the specified time. If NBN Co gives the ԭ a varied undertaking in response to the notice, the ԭ must consider the varied undertaking as if it had been given to the ԭ instead of the original undertaking. The ԭ intends to undertake a short consultation on any varied undertaking that is given by NBN Co in response to the notice, and to then proceed to make a final decision on the varied undertaking. The statutory deadline by which this final decision must be made will depend upon whether and when NBN Co lodges the varied undertaking and for how long the ԭ consults on the varied undertaking. If NBN Co does not give the ԭ a varied undertaking in response to the notice in accordance with the requirements in the CCA, the ԭ will proceed to make a final decision on the original 18December 2012 undertaking. In either of these cases, the ԭ must make its final decision by the statutory deadline for the original undertaking. This deadline was extended by three months on 4 July 2013, and has been extended by a further three months at the time of issuing this Notice to Vary. Background to Notices to Vary Section 152CBDA of the CCA provides for the ԭ to give a written notice to NBN Co in respect of its SAU that invites NBN Co to make variations to the SAU in accordance with the notice. If NBN Co does so, the ԭ must consider the varied undertaking as if it had been given to the ԭ instead of the SAU. The purpose of such a notice is to streamline the SAU assessment process, as NBN Co does not need to submit a new SAU in order to address the matters set out in the notice. A section 152CBDA notice must: specify variations to the SAU; specify a period in which NBN Co may give a varied undertaking to the ԭ; and state that the ԭ will consider the varied undertaking as if it had been given instead of the SAU. The ԭ giving NBN Co a notice under section 152CBDA will have the following immediate effects: it acts as a clock-stopper (that is, the period of time in which NBN Co may give a varied undertaking, as specified in the notice, is disregarded when calculating the six-month decision period under subsection 152CBC(5)); and it allows NBN Co to choose whether to give a varied undertaking in response to the notice. The length of the clock-stopper will ultimately depend on whether NBN Co gives a varied undertaking, and the significance of the variations. If NBN Co does not give a varied undertaking, the clock-stopper ends on the deadline specified by the ԭ for NBN Co to give a varied undertaking. If NBN Co does give a varied undertaking containing significant variations, the ԭ will publish the varied undertaking for public consultation and the clock-stopper will end at the close of the specified consultation period. If NBN Co decides to give a varied undertaking to the ԭ, it has the following effects: the ԭ will generally be required to publish the varied undertaking and invite submissions that it must consider when making a decision on the varied undertaking; and the ԭ will make a decision on the varied undertaking without NBN Co being required to withdraw the SAU. If NBN Co chooses not to give a varied undertaking the ԭ will proceed to make a final decision in respect of the 18 December 2012 SAU. Other than the mandatory elements of a section 152CBDA notice set out above, the ԭ may exercise its own judgment about when and how it issues a notice that will most effectively streamline the undertaking assessment process. The ԭ will generally issue a Notice to Vary under Part XIC where it has reached a preliminary view that the original undertaking does not meet the statutory criteria, and therefore cannot be accepted. The preliminary position in the ԭs April 2013 Draft Decision was that the 18 December 2012 SAU does not satisfy the criteria for acceptance of an undertaking. The variations included in the Notice to Vary are those that the ԭ considers necessary in order for the varied SAU that is given in response to the notice to be acceptable under the statutory criteria. The ԭ has taken into account the views expressed in submissions in formulating these variations. Interaction between the SAU and the telecommunications access regime The variations that are discussed in this section relate to the issues discussed in chapter 2 of the Draft Decision, section 2.1 of the Consultation Paper, section 2.1 of the Response to Submissions and the Main Body and Schedule 1B of the Notice to Vary. Relationship between Standard Forms of Access Agreement, the SAU and regulatory determinations In the draft Notice to Vary, the ԭ proposed to remove the regulatory recourse commitments that link Standard Forms of Access Agreement (SFAAs) to the Part XIC legislative hierarchy from the SAU that is, the commitments requiring NBN Co to ensure consistency between: SFAAs and the SAU; and SFAAs and regulatory determinations (that is, Access Determinations and Binding Rules of Conduct). In their submissions to the draft Notice to Vary, Telstra and Optus continue to consider that the SAU should include express regulatory recourse commitments. In contrast, NBN Co and other access seekers submissions support the ԭs proposed variation. Telstra and Optus submit that practically, access seekers must enter into an SFAA-based Access Agreement to obtain supply of services, and by virtue of the operation of the Part XIC legislative hierarchy, these Access Agreements will prevail over the SAU and any regulatory determinations. Therefore, to give access seekers certainty that they will be able to obtain access to regulated terms, Telstra and Optus consider that the SAU should include the following commitments: Telstra submits that NBN Co should ensure consistency between SFAAs and ԭ regulatory decisions. Further, NBN Co should positively incorporate ԭ regulatory decisions into SFAAs, retail service providers (RSPs) should not be obliged to take any unilateral amendments to SFAAs to access ԭ regulatory decisions, and the ԭ should be involved in verifying pull through of regulated terms into SFAAs. Optus submits that NBN Co should flow-through regulated terms into Access Agreements. Specifically, access seekers should have the ability to sign an Access Agreement with reservations on provisions that are not agreed between the parties, which may later be overruled by ԭ regulatory determinations. The ԭ considers that including regulatory recourse commitments in the SAU would not necessarily address Telstra and Optus concerns. As discussed in the Response to Submissions, if the commitments requiring NBN Co to ensure that SFAAs are consistent with the SAU and regulatory determinations are retained, NBN Co could choose to make SFAAs consistent with regulated terms by including these terms in SFAAs or by removing inconsistent terms from SFAAs. Therefore, access seekers may not have additional certainty that NBN Co will make regulated terms available via SFAAs. Further, if there are commitments specifying the manner for incorporating regulated terms into SFAAs and/or Access Agreements, the SAU would create additional processes about the operation of the Part XIC hierarchy. These would operate concurrently with the normal operation of Part XIC, and could inadvertently create complexity and uncertainty about the obligations of NBN Co and the rights of access seekers. Given the new and untested nature of the Part XIC regime, this could lead to the risk of unintended consequences. In light of the above, the ԭ has not adopted Telstra or Optus proposals, and has instead implemented its proposal to remove the explicit links between SFAAs and the SAU and regulatory determinations. As explained in the Response to Submissions, the ԭs proposal is intended to create certainty that Part XIC will continue to operate in its normal way following acceptance of the SAU, free from any ambiguity or unintended consequences that may arise from including such provisions in the SAU. Specifically, under Part XIC: NBN Co must comply with an access seekers request to supply services on regulated terms (to the extent they are not inconsistent with its Access Agreement); access seekers do not have to enter into an Access Agreement to obtain access on regulated terms (although NBN Co and access seekers can commercially agree to include regulated terms in an Access Agreement if they wish to do so); and NBN Co, the ԭ and access seekers can seek to enforce the terms in regulatory determinations. The ԭ recognises that Part XIC establishes the primacy of commercial agreements; however, it also considers that access seekers should have the opportunity to seek an effective regulatory fallback in the absence of such agreement. In particular, the ԭ acknowledges access seekers concerns about the possible consequences of executing commercial agreements prior to regulated terms being established on matters that may not be agreed, and notes that ongoing negotiations between NBN Co and access seekers are occurring in this context. Having regard to the current commercial and regulatory context, the ԭ considers that the following framework would adequately address the practical difficulties within the existing regulatory regime the ԭ would expect that, in practice, NBN Co would incorporate the terms of any regulatory determination (if and when established by the ԭ) into its SFAAs, and in particular: Consistent with the Part XIC legislative hierarchy, regulated terms would not override commercially agreed terms. Where the ԭ determines disputed terms prior to the execution of commercial agreements, the ԭ expects that NBN Co will make regulated terms available to parties via their incorporation into its SFAAs for subsequent inclusion in prospective Access Agreements. Where the ԭ has not yet determined disputed terms prior to the execution of commercial agreements, the ԭ expects that NBN Co will include disputed terms in commercial agreements on an interim basis only, pending the ԭs determination of regulated terms. These regulated terms would then have their ordinary effect, in that access seekers can request access on these terms on a standalone basis, or NBN Co and access seekers can agree to include these terms in an Access Agreement. In the event that this did not occur in practice, the ԭ would consider other options, such as requiring in an Access Determination that NBN Co incorporate the terms and conditions in an Access Determination in its SFAAs, or the making of more comprehensive Access Determinations. Conduct about the development of SFAAs (Multilateral SFAA forum) In the draft Notice to Vary, the ԭ proposed to remove a number of detailed processes about the multilateral SFAA forum, and retain commitments relating to the establishment of the forum, who can participate, and when it will be conducted. In their submissions to the draft Notice to Vary, iiNet and Telstra propose further variations to the multilateral SFAA forum provisions, as follows: iiNet submits that further commitments about the processes for conducting the forum are necessary because it is not efficient to seek procedural directions from the ԭ under section 152BBA of the CCA if issues arise in future. In particular: NBN Co should inform access seekers as soon as reasonably practicable about whether it agrees with an access seeker request to vary the SFAA; confidentiality restrictions on NBN Cos negotiations with access seekers should not apply to the disclosure of information to the ԭ; and NBN Co must have regard to any regulatory determinations when considering future changes to SFAAs. Telstra submits that the multilateral SFAA forum should commence no later than 12 months after the SAU commencement date and continue for the first five years of the SAU term. It considers that the timing of the forum should not be linked to SFAA expiry on the assumption the ԭ is no longer endorsing a co-terminus SFAA regime, as RSPs will be on Access Agreements expiring at different dates. However, it does not explain why the forum should only operate for five years. The ԭ has not adopted the further procedural commitments proposed by iiNet. As noted in the Response to Submissions, the ԭ is of the view that industry should be free to determine the nature and extent of commercial negotiations, with ԭ intervention only if agreement cannot be reached. In particular, the ԭ notes that NBN Co has stated that it intends to consult with Access Seekers on the terms of reference and procedures for the Multilateral SFAA Forum in due course. Further, the ԭ reiterates that if necessary, its ability to give procedural directions under section 152BBA of the CCA will enable it to facilitate appropriate access arrangements where there may be attempts to delay or frustrate negotiations on the terms of access. The ԭ also considers that it is not necessary to adopt Telstras proposal about the timing of the forum because the SAU still provides for a co-terminus SFAA regime. As explained in the Response to Submissions, the ԭs proposal about the timing of the forum is intended to provide all parties with certainty that there is an avenue for ongoing commercial negotiations about the next SFAA, and that there will be at the least a 12 month period for conducting these negotiations. In addition, the ԭ notes that NBN Co has proposed minor drafting amendments to clause 1B.3 to clarify that NBN Co publishes each SFAA under the CCA and will do so in accordance with clause 6 of the SAU. NBN Co also proposes to include a transitional provision to clarify that the requirement to convene the forum at least 12 months prior to the expiry of each SFAA will not apply to SFAAs that expire within 12 months of the SAU commencement date. The ԭ has included these drafting clarifications in the Notice to Vary. Conduct about submitting variations to the SAU (Replacement Modules) In the draft Notice to Vary, the ԭ proposed to retain an amended version of the replacement module process in the SAU. In their submissions to the draft Notice to Vary, NBN Co and Telstra propose a number of specific variations to the replacement module provisions, as follows: Length of the regulatory cycle NBN Co submits that the SAU should explicitly state that the length of the regulatory cycle is limited to three, four or five financial years in duration. In contrast, Telstra submits that regulatory cycles should be capped at three years, consistent with the regulatory periods adopted by the ԭ for previous Access Determinations. Content of the replacement module applications NBN Co proposes amendments to the provisions relating to the RAB roll-forward arrangements (in the RAB roll-forward Proposal) and tax change events (in the LTRCM Proposal), as well as the removal of the reference offer proposal. Effect of replacement module determinations NBN Co proposes the inclusion of a provision to clarify that section 152CBIA applies to a replacement module determination as if those determinations were Access Determinations. Replacement module determination process Telstra submits that ԭ consultation during the process of making a replacement module determination should be mandatory, consistent with the process that applies to the making of an Access Determination. In relation to the length of the regulatory cycle, the ԭ stated in the Response to Submissions that it should retain discretion to decide the length of the regulatory cycle (whether three, four or five years) after considering the information submitted by NBN Co in the replacement module application and in any submissions received during public consultation. The ԭ considers that this strikes the right balance between regulatory certainty and flexibility, because the length of the regulatory cycle will be a factor in determining NBN Cos efficiency incentives. Therefore, the ԭ has not adopted Telstras proposal to limit regulatory cycles to three years. Instead, in the Notice to Vary, the ԭ has adopted NBN Cos proposal to include drafting clarifications stating that regulatory cycles will be three, four or five years in duration. The ԭs views on the content of the replacement module applications, that is, the RAB roll-forward arrangements, tax change events, and the removal of the concepts of reference offers and non-reference offers, are discussed in sections  REF _Ref366660056 \r \h \* MERGEFORMAT 6.3.1,  REF _Ref366660072 \r \h \* MERGEFORMAT 5.3.2 and  REF _Ref368901238 \r \h 4.2.2 respectively. The ԭ has not adopted NBN Cos proposed variations in relation to clarifying the effect of replacement module determinations. NBN Co notes the ԭs views that a replacement module determination made by the ԭ must always be consistent with all the provisions in Modules 0 and 2; however, it submits that future interactions between replacement module determinations and the SAU may, in effect, give rise to consistency issues. NBN Co therefore considers that the SAU should specify and preserve the Part XIC legislative hierarchy in the context of a conferral of power by referring to the application of the inconsistency provision in the CCA (that is, section 152CBIA), so that the SAU prevails to the extent of any inconsistency over a replacement module determination. The ԭ considers that it is undesirable to replicate the operation of the Part XIC legislative hierarchy in the context of a conferral of power under the SAU, because it is unclear if inconsistency under the Part XIC hierarchy would have the same meaning in this context. Given the new and untested nature of the Part XIC regime, this could create complexity and uncertainty about how the ԭ will exercise its replacement module determination power in future. Further, the ԭ does not accept that it would inadvertently make a replacement module determination that would be inconsistent with Modules 0 and 2. Consistency with Modules 0 and 2 will be an important consideration for the ԭ in making replacement module determinations, since it would not be in the long-term interests of end-users or reasonable for parts of the SAU to be inconsistent with each other. The ԭ also considers that it is not necessary to adopt Telstras proposal to make consultation mandatory during the replacement module determination process. As explained in the Response to Submissions, the replacement module process would, in practice, require the ԭ to concurrently engage in the process of assessing a replacement module application and the process of making a replacement module determination. Since replacement module applications are assessed as variations to the SAU under section 152CBG of the CCA, the ԭ would be undertaking public consultation on NBN Cos proposals. The information obtained during this consultation process would be relevant to the making of a replacement module determination if the ԭ ultimately does not accept NBN Cos proposed replacement module application. Therefore, in the Notice to Vary, the ԭ has only included NBN Cos proposed variations in relation to the length of the regulatory cycle and some aspects of the content of replacement module applications. Services to which the SAU relates The variations that are discussed in this section relate to the issues discussed in chapter 3 of the Draft Decision, section 2.2 of the Consultation Paper, section 2.2 of the Response to Submissions and Schedules 1A and 2A of the Notice to Vary. Uncertainty in relation to the ԭ's ability to set terms and conditions In the draft Notice to Vary, the ԭ proposed to include the following variations to the SAU: an acknowledgement that the ԭ may declare services; an acknowledgement that the SAU does not affect NBN Cos obligations under the Standard Access Obligations (SAOs) in respect of ԭ-declared services; an acknowledgement that regulatory determinations are not rendered inconsistent with the SAU to the extent that they relate to a service that falls within the SAU service descriptions but is not an Offer (that is, products, product components, product features, Ancillary Services or types of Facilities Access Service) that NBN Co is required to supply under the SAU; and the amendment of clauses referring to the fulfilment of obligations under the SAU and the SAOs that might otherwise be inconsistent with the above. These variations are intended to remove uncertainty as to how the SAU will interact with the powers conferred on the ԭ by the CCA to declare services and set terms and conditions for those services via regulatory determinations in circumstances where NBN Co may not face incentives to respond to evolving end-user demand. In its submission to the draft Notice to Vary, NBN Co submits that the third proposal is unnecessary. NBN Co argues that this commitment (that is, clauses 1A.7.2 and 2A.2 of the draft Notice to Vary) attempts to exclude any Regulatory Determination in relation to a service (that falls within the scope of the NBN Access Service but is not an Offer) from being inconsistent with the SAU, and that it does not agree that the SAU should attempt to define what matters may or may not be inconsistent with it when dealt with in future Regulatory Determinations, as this is a matter to be determined on a case by case basis pursuant to Part XIC. NBN Co instead proposes drafting amendments that clarifies that the SAU does not affect NBN Cos obligations to supply, whether that obligation arises under section 152AXB or under terms and conditions of supply as imposed on NBN Co by the ԭ. In contrast, access seeker submissions support an approach where regulatory determinations about ԭ-declared services are not rendered inconsistent with the SAU. The inclusion of the proposed clauses 1A.7.2 and 2A.2 was intended to clarify that the SAU is not intended to render regulatory determinations inconsistent with the SAU (that is, regulatory determinations will have effect) in the following particular circumstances: where the ԭ declares a service that falls within the scope of the SAU service descriptions, but is not an Offer that NBN Co is required to supply under the SAU, and the ԭ sets price and non-price terms and conditions for that ԭ-declared service in regulatory determinations; or where the ԭ makes a regulatory determination requiring NBN Co to supply a product that falls within the scope of the SAU service descriptions, but is not an Offer that NBN Co is required to supply under the SAU, and that regulatory determination sets price and non-price terms for the supply of that service. These proposed variations were not aimed at changing the operation of the Part XIC legislative hierarchy. Following further consideration, the ԭ is of the view that the inclusion of this commitment in the SAU is unnecessary. The ԭ notes that these drafting amendments are complex and their effect could be uncertain. At this time, the ԭ considers that if it is necessary to do so, it is able to rely on the Part XIC powers and processes, specifically, its declaration power, to require NBN Co to supply specific services that are not Offers that NBN Co is required to supply under the SAU. In accordance with the normal operation of Part XIC, the terms and conditions in any regulatory determinations in relation to that ԭ-declared service will apply to the extent that they are not inconsistent with the SAU. Therefore, the ԭ has deleted these proposed commitments (that is, clauses 1A.7.2 and 2A.2 of the draft Notice to Vary), and is not adopting NBN Cos suggested drafting amendments in the Notice to Vary. Product component bundling In its submission to the draft Notice to Vary, NBN Co argues that the ԭs proposed variations to clauses 1A.3.2 and 2A.3 of the draft Notice to Vary (clauses 1A.4.2 and 2A.3 in the Notice to Vary), which allow NBN Co to require access seekers to purchase the four product components (UNI, AVC, CVC and NNI) where technically necessary for the supply of the NBN Access Service, does not address a number of implementation issues. For example, NBN Co submits that the following issues would not be covered: technical or operational issues associated with the supply of a CVC or an NNI in conjunction with an AVC (NBN Co provides some examples of this including that a CVC of the same traffic class as the AVC is required to supply a service, and a new NNI Group must be purchased beyond 4000 CVCs); and technical reasons where the supply of an AVC of one traffic class requires that it be purchased in conjunction with an AVC of a different traffic class (NBN Co provides one example of this that the supply of a Multicast AVC requires an underlying traffic class 4 AVC to provide a backchannel data path). The ԭ acknowledges the implementation issues raised by NBN Co. However, the ԭ considers that NBN Cos proposed drafting amendments (including a broad exception for reasons of technical compatibility, network operations, capacity or scale associated with the supply of the CVC or NNI), may give NBN Co discretion to require access seekers to purchase extra product components beyond those necessary from a technical perspective for the supply of the NBN Access Service. To address these issues, the ԭ has instead refined the drafting of clauses 1A.4.2 and 2A.3 in the Notice to Vary to provide that NBN Co may require access seekers to acquire a UNI, a CVC and a NNI, or an AVC of a different traffic class in conjunction with the AVC, if it would otherwise not be possible to supply the NBN Access Service. This is intended to clarify that the SAU only permits NBN Co to require access seekers to purchase further product components where it is technically necessary for the supply of an end-to-end access service by NBN Co. Product development, product withdrawal and reference offers The variations that are discussed in this section relate to the issues discussed in chapter 4 of the Draft Decision, section 2.3 of the Consultation Paper, section 2.3 of the Response to Submissions and Schedules 1I and 2D of the Notice to Vary. Product development and variation Term of operation of the PDF Processes and interaction with network design change provisions The 18 December 2012 SAU requires NBN Co to establish a Product Development Forum (PDF). Module 1 of the 18 December 2012 SAU establishes PDF Processes that specify terms and conditions about how NBN Co will consult with its customers via the PDF about whether to develop a new product or vary an existing product. Module 1 of the 18 December 2012 SAU also includes provisions which establish a customer engagement process that NBN Co must follow to make certain types of network design changes. This customer engagement process uses the PDF and the PDF Processes to consult with access seekers about these network changes. Module 1 also contains provisions which address circumstances in which the development of a new product, or the variation of an existing product, will require a network design change. Module 2 contains provisions which address the interaction between making minor product variations and network design changes. The draft Notice to Vary proposed to: reduce the term of the provisions for making network changes in Module 1 to five years; reduce the term of the PDF Processes in Module 1 to five years; replace the provisions in Module 1 which address the interactions between product development and network changes with a single clause which states that Notwithstanding any provisions in this Schedule 1J, NBN Co must comply with any applicable requirements in relation to the identification, selection, consultation and endorsement of any Network Change including, during the period in which they have effect, clauses 1E.8 to 1E.12; and replace the provisions in Module 2 which address the interactions between minor product variations and network changes with a single new clause in Module 2 which states that Notwithstanding any provisions in this Schedule 2E, NBN Co must comply with any applicable requirements in relation to the identification, selection, consultation and endorsement of any network change. In NBN Cos submission: NBN Co considers that there needs to be a workable approach to network changes once the current PDF Processes expire after five years in the event that a replacement set of PDF Processes are not in place (NBN Cos proposed approach is discussed in section  REF _Ref366575855 \r \h \* MERGEFORMAT 6.2.3.3 below). NBN Co submits that the ԭ should reinstate the former clause 1I.3.4(b) in the Notice to Vary. It argues that prior customer endorsement of a network change is important because without it NBN Co would not be able to include this capital expenditure in the RAB for recovery over time. NBN Co notes that in clause 2E.1.1(b) of the draft Notice to Vary the ԭ has retained a requirement in relation to NBN Cos compliance with network changes in Module 2. It argues that this drafting is redundant as the network change process no longer has a role to play in Module 2. It also argues that any requirements concerning the process for network changes and expenditure on network changes in Module 2 are not yet known, and that NBN Co cannot commit to compliance with unknown and uncertain requirements. The ԭs position on the approach to network changes after the initial five years of the SAU is discussed in section  REF _Ref366575855 \r \h \* MERGEFORMAT 6.2.3.3. In summary, the Notice to Vary includes provisions that will allow the ԭ to approve a network design change proposed by NBN Co after the initial five years, including via a network change endorsement process contained in an Access Determination. The ԭ considers that these changes will provide a workable approach to network changes once the current PDF Processes expire, as desired by NBN Co. As a consequence of these proposed changes, the Notice to Vary reinstates clause 1I.3.4(b) as a new clause 1I.3.7, as requested by NBN Co, with some further amendments to reflect the changes made to the network design endorsement processes. The ԭ considers that this clause should provide certainty to NBN Co that any prudent and efficient capital expenditure associated with new product idea that requires a network design change will be recognised in the RAB, and should therefore ensure that NBN Co is not discouraged from making otherwise prudent and efficient investments. In relation to clause 2D.2.1(a), the ԭ recognises NBN Cos concerns that it is difficult for it to commit to complying with network change provisions that have not yet been established, in particular given that the ԭ proposes to remove the existing network change provisions from Module 2. The ԭ therefore has not included the proposed clause 2E.1.1(b) in the Notice to Vary. Commitments by NBN Co to consult with consumer advocacy groups The draft Notice to Vary proposed to allow Consumer Advocacy Groups to participate in the PDF, under the following definition: Consumer Advocacy Group means a body or association that represents the interests of consumers. NBN Cos submission states that the ԭs proposed definition covers any type of group representing any form of consumer interests. NBN Co proposes that the definition of Consumer Advocacy Group should include reference to the fact that the group should be one that deals with telecommunications interests of end-users. In light of this, NBN Co proposes the following definition of Consumer Advocacy Group (NBN Cos additions are underlined): Consumer Advocacy Group means a body or association that represents the interests of consumers in relation to telecommunications services and issues in Australia. Optus submission argues that references to Consumer Advocacy Groups should be removed. Optus reiterates views it provided in its previous submission to the SAU Draft Decision which states that it is not clear what benefits arise from having a formal role for Consumer Advocacy Groups in the PDF, particularly in the context of wholesale decision making. The ԭ has not adopted Optus proposal to remove the concept of Consumer Advocacy Groups and participation of these groups in the PDF. The ԭs reasons for including a role for Consumer Advocacy Groups are outlined in its Response to Submissions for the draft Notice to Vary. The ԭ does not consider that it has received new or updated information that would warrant a different approach in the Notice to Vary. In relation to NBN Cos submission, the ԭ recognises that the definition in the draft Notice to Vary could allow any group that represents the interests of consumers to participate in the PDF. This could, in some circumstances, lead to discussions in the PDF about consumer-related issues which are not related proposing and developing new products supplied over the NBN (or the variation of existing products), and the prices, technical specifications and service levels of these products. As one of the primary objectives of the PDF is to facilitate open and consultative dialogue with access seekers and Consumer Advocacy Groups about the development of new product ideas and the enhancement or variation of existing products, the ԭ considers that it is reasonable to limit participation to Consumer Advocacy Groups that at minimum represent consumers of telecommunications services. However, the ԭ does not consider that participation by Consumer Advocacy Groups in the PDF should not be limited to those groups that only represent consumers in relation to the delivery of telecommunications services. This might otherwise prevent the participation of more diverse groups that represent broader consumer interests (such as small business representatives and generalist consumer representatives) but who also represent the interests of consumers in the delivery of telecommunications services. In light of these views, the Notice to Vary adopts an amended version of NBN Cos proposed definition. The amendments are intended to reduce any uncertainty or ambiguity about whether a group whose functions include (but are not limited to) representing consumers in relation to the delivery of telecommunications services may participate in the PDF. This definition is as follows (with the additions from the draft Notice to Vary underlined): Consumer Advocacy Group means a body or association whose functions include representing the interests of consumers of telecommunications services in Australia. Confidential Information and Intellectual Property terms The PDF Processes include clauses which establish rights and obligations for NBN Co and its customers about the treatment of confidential information and intellectual property associated with new product ideas. The draft Notice to Vary proposed to remove these provisions from the 18 December 2012 SAU, and insert new clauses in Module 1 and Module 2 which: state that NBN Co may require access seekers and Consumer Advocacy Groups to enter into arrangements regarding the treatment of confidential information and intellectual property rights prior to participating in the PDF; and confer a power on the ԭ to determine the terms of any such arrangements in the event of disagreement between the parties. Submissions provide the following views: NBN Co proposes some minor refinements to the drafting in relation to the ԭs conferred power to address what it considers are some practical issues of implementation. In Telstras submission: Telstra expresses concern that the proposed conferral of power which allows the ԭ to determine the confidentiality and intellectual property arrangements between NBN Co and other parties may impact on an RSPs willingness to engage in these processes. It argues that the value of an RSPs pre-existing intellectual property or commercially valuable information may be materially devalued (or destroyed) if it is passed to NBN Co or other participants without adequate consideration to these matters. Telstra also considers that the ԭs proposal fails to acknowledge that there are two very different roles that participants play in the PDF: (1) the role of the participant who submits a Product Idea, and (2) the role of the participant who is simply an interested party in the consultation processes. Telstra proposes that, when a party submits a Product Idea to NBN Co, the confidentiality and intellectual property terms with that idea should only be subject to agreement between the parties, and does not believe that these terms can, or should, be settled through the intervention of the ԭ. Telstra proposes that participation by other interested parties should not be conditional upon that party reaching agreement with NBN Co on confidentiality and intellectual property provisions associated with Product Ideas. However, Telstra notes that confidentiality provisions may need to be agreed prior to participation to ensure that information that is shared with participants is appropriately protected. Optus proposes an additional clause stating that nothing in the clauses has the effect of preventing parties or multiple parties requesting additional non-disclosure agreements to be signed to gain access to particular proposals that have intellectual property attached. The ԭ recognises that there are differing views between parties as to how intellectual property and confidential information should be protected during the product development process, and how agreements between parties on the treatment of intellectual property and confidential information should be established or determined. These differing views mean that it is difficult to establish a framework in the SAU that is both flexible enough to adequately protect the confidential information and intellectual property rights of parties in all circumstances, while also maximising participation in the product development processes. In light of this, the Notice to Vary does not include the conferral on the ԭ to determine the terms of any confidentiality and intellectual property arrangements that were proposed in the draft Notice to Vary. However, the Notice to Vary includes a clause which clarifies the extent to which the ԭ can specify terms and conditions regarding the treatment of confidential information and intellectual property, including in an Access Determination. This will means that any confidentiality and intellectual property arrangement between NBN Co and another party will be subject primarily to commercial negotiation between the parties. This will allow the parties to agree to the types of confidentiality and intellectual property protections necessary to participate in the PDF, including those that are tailored to different circumstances (for example, the submission of a product idea, or general participation in consultation) and to different parties. In the event of disagreement between the parties, the ԭ may consider further how it may exercise its other powers under Part XIC to address these matters. The Notice to Vary retains the provision that allows NBN Co to require access seekers and Consumer Advocacy Groups to enter into confidentiality and intellectual property agreements in relation to their participation in the PDF. The ԭ considers that this provision is appropriate because the Notice to Vary also requires NBN Co to make the PDF open to participation by all access seekers and Consumer Advocacy Groups (irrespective of whether these parties have agreed to confidentiality and intellectual property arrangements). Without a provision in the SAU that allows NBN Co to require parties to enter into confidentiality and intellectual property arrangements, NBN Co would be required to allow parties to participate in the PDF without any agreements in place about the use and disclosure of confidential information and intellectual property. This would likely discourage the submission and development of product ideas. List of Initial Products exempt from product development and the PDF Processes The 18 December 2012 SAU establishes that the product development provisions in the SAU (including the PDF Processes) do not apply to products, product components and product that are covered by, or contemplated within, NBN Cos Initial Product Roadmap. The draft Notice to Vary proposed to remove the exclusion of products that are covered by, or contemplated within, NBN Cos Initial Product Roadmap. However, it proposed a list of Initial Products (contained in Attachment D to the Main Body of the SAU) that would be excluded from the product development provisions. The draft Notice to Vary also added provisions that made it clear that the product development provisions apply to all Ancillary Services and types of Facilities Access Service. In NBN Cos submissions, it proposes that the following additional products should be added to the list of Initial Products: CVC TC-1 (50, 100, 150, 200, 250, 300, 400 and 500 Mbps). CVC TC-4 (150, 250, 2,000, 3,000, 4,000, 5,000, 6,000, 7,000, 8,000, 9,000 and 10,000 Mbps). AVC TC-MC 60 Mbps. Ancillary Services the Platform Interfacing Service and the Sandpit. Facilities Access Service Cross-Connect, NBN Co Co-Location, NBN Co ODF Termination Point and other Facilities supplied by NBN Co that are necessary to facilitate entry to buildings, such as cable trays or building duct access. In addition to its submissions, NBN Co has also requested the inclusion of the following products to the list of Initial Products (as well as NBN Offers in Schedule 1C, as discussed in section  REF _Ref368043897 \r \h 5.2.1.1): NBN Co Building Entry Service (as a type of Facilities Access Service). CVC TC-4 (1100, 1200, 1300, 1400, 1500, 1600, 1700, 1800 and 1900 Mbps. In relation to the additional AVC and CVC product features, NBN Co submits that these products have already been announced by NBN Co in either its Product and Pricing Overview documents or in its Product Roadmap, and have already been consulted on. In relation to the addition of Ancillary Services and types of Facilities Access Services, NBN Co submits that Facilities Access Services and Ancillary Services have now been brought into the scope of the PDF and should be included within the scope of what is covered by Initial Products. In Telstras submission, it proposes the following amendments to the list of Initial Products: Removal of CVC TC-4 (700, 800, 900 and 1000 Mbps) product features Telstra argues that further customer engagement is required in respect of speeds greater than 600 Mbps. Removal of CVC TC-2 (all data-rates) and TC-3 (all data-rates) product features Telstra argues that the industry is yet to see detailed products technical specifications on any TC-2 or TC-3 and as such they should not be included in the list of Initial Products. Removal of Additional Enhanced Service Levels product feature Telstra argues that further customer consultation is required in respect of Additional Enhanced Service Levels because NBN Co has not produced a paper detailing what will be introduced, the product roadmap does not have any planned implementation dates and it is not known what the exact timeframes or prices will be in respect of this product feature. Removal of Business Grade NTD product feature Telstra argues that the business Grade NTD should not be included in the list of Initial Products because NBN Co has not provided any discussion papers or consulted with industry in respect of this product feature. Addition of CVC TC-1 (50, 100, 150, 200, 250, 300, 400 and 500 Mbps) product features Telstra notes that these product features are set out in Schedule 1C of the SAU and should be reflected in the Initial Products list for consistency. In Optus submission, it proposes that the list of exempt Initial Products should be refined to take into account only the products that have already been delivered to market. It also proposes that, in the absence of this refinement (or even in addition to this), the ԭ should be granted a conferral of power to allow the operation of the PDF to include any discussion on products listed within the suite of Initial Products (similar to the ԭ disallowance power proposed for product withdrawal matters). Optus proposes a list of criteria that could warrant the ԭ excluding a product from the list of Initial Products. In light of these views, the Notice to Vary proposes the following variations to the list of Initial Products that were contained in the draft Notice to Vary: Addition of the CVC TC-1 (50, 100, 150, 200, 250, 300, 400 and 500 Mbps) product features. Addition of the CVC TC-4 (1100, 1200, 1300, 1400, 1500, 1600, 1700, 1800, 1900 and 2000 Mbps) product features (discussed below). Addition of the AVC TC-MC 60 Mbps product feature. Addition of Ancillary Services (Platform Interfacing Service and the Sandpit) the ԭ is satisfied that NBN Co has sufficiently consulted with industry on these products, including on technical specifications and prices. Addition of Facilities Access Service (Cross-Connect, NBN Co Co-Location and NBN Co ODF Termination Point) the ԭ is satisfied that NBN Co has sufficiently consulted with industry on these products, including on technical specifications and prices. Removal of the Business Grade NTD product feature upon further consideration, the ԭ considers that is not has received evidence in order to be satisfied that there has been sufficient consultation on this product feature for it to be included on the list of Initial Products. The Notice to Vary only includes a number of minor refinements to the headings and drafting of Attachment D, as proposed by NBN Co. In relation to the additional CVC TC-4 product features up to 2000 Mbps, as discussed further in section  REF _Ref368043897 \r \h 5.2.1.1, the ԭ understands that NBN Co intends to release these products by the end of 2013. The ԭ considers that requiring these product features to go through the PDF Processes will likely delay (potentially significantly) the commercial release of these products. The Notice to Vary does not include the CVC TC-4 product features between 2,000 and 10,000 Mbps, as proposed by NBN Co. While these product features have recently been added to NBN Cos Initial Product Roadmap, these product features are intended to be release until 2015 and beyond. The ԭ considers that it is appropriate to subject these additional CVC tiers to the product development process, as it will give access seekers and Consumer Advocacy Groups an opportunity to provide feedback to NBN Co on the development and introduction of these additional tiers (including on service levels and price) in the context of the market environment. The Notice to Vary also does not include other Facilities supplied by NBN Co that are necessary to facilitate entry to buildings, such as cable trays or building duct access, as proposed by NBN Co. This is because, in contrast to the other product components, product features and types of Facilities Access Service contained on the list of Initial Products, this type of Facilities Access Service is broadly defined and may cover types of Facilities Access Service that have not yet been developed or undergone sufficient consultation to date. This will mean that, if NBN Co wishes to introduce a type of services that is necessary to facilitate entry to buildings such as cable trays or building duct access, it must do so in accordance with the product development provisions. Finally, the Notice to Vary retains the CVC TC-2, CVC TC-3 and Additional Enhanced Service Levels product features, rather than removing these product features as proposed by Telstra. In relation to the CVC product features, the ԭ is satisfied that these products have been subject to sufficient consultation to be included on the list of Initial Products. Furthermore, NBN Co has recently released technical specifications for these product features, which should address Telstras concerns. In relation to Additional Enhanced Service Levels, while NBN Co has only consulted on the pricing for the 12 and 8 hour offerings, the ԭ is satisfied that this product construct has been subject to sufficient consultation to be included on the list of Initial Products. Additional variations proposed by Telstra In in its submission to the Draft Decision and Consultation Paper on the Notice to Vary, Telstra proposed a number of additional variations to the product development provisions in the 18 December 2012 SAU. The ԭ sought further views on Telstras proposals in its Response to Submissions. Submissions provide the following views: NBN Co agreed to adopt the additional variations proposed by Telstra and proposed SAU drafting to implement the proposals. Telstra proposed SAU drafting to implement its proposals. Optus, CCC, AAPT and Herbert Geer supported the additional variations proposed by Telstra. The Notice to Vary proposes drafting to implement the following of the variations proposed by Telstra: That NBN Co be required to include on the Product Ideas register additional information and updates about the status of product ideas under consideration and development. That NBN Co be required to consult with the PDF on its initial assessment on whether to develop a product idea. That a Product Construct Paper should contain NBN Cos proposed price-related terms. That NBN Co be required to consult on the technical attributes for each product idea. That NBN Co be required to publish and maintain an Integrated Product Roadmap that outlines how IT support and operational support are being developed for the new products under development. The drafting to implement these proposals in the Notice to Vary seeks to balance the legitimate business interests of NBN Co and the interests of access seekers. To develop this drafting, the ԭ has adopted drafting from both NBN Co and Telstras submissions where it considers it appropriate. Product withdrawal and reference offers Product withdrawal disallowance The draft Notice to Vary proposed a conferral of a power on the ԭ to disallow the withdrawal of a currently supplied product, product component, product feature, Ancillary Service and types of Facilities Access Service by NBN Co. Under this conferral of power, NBN Co would be prevented from withdrawing a product for the time period specified by the ԭ, which must not be more than five years. In NBN Cos submission, it argues that five years is too long a period to disallow a product withdrawal, and that a shorter period of two years should be applied. It argues that the ԭ will still have an objection power in relation that subsequent product withdrawal after an initial two years. This means that ԭ would be able to ensure that the withdrawal of products that would not promote the long-term interests of end-users would not occur. The Notice to Vary has retained the proposal that the ԭ may disallow the withdrawal of a product for up to five years. This will allow the ԭ to determine the timeframe in which NBN Co cannot withdraw a product based on the individual circumstances of the withdrawal. The ԭ considers that this is both reasonable and necessary because: there may be circumstances where it will promote the long-term interests of end-users for a product to not be withdrawn for up to five years (for example, it may promote the long-term interests of end-users to ensure the on-going supply of certain products); allowing the ԭ to disallow the withdrawal of this product for the full five years will reduce the regulatory and administrative burden of repeating the process of notification and disallowance every two years; and for those circumstances in which there is persuasive evidence that disallowing a product withdrawal for less than five years will promote the long-term interests of end-users (including when there is a likelihood that circumstances may change), the drafting of the Notice to Vary will give the ԭ the flexibility to disallow the product withdrawal for a shorter period. Removal of distinction between reference and non-reference offers In the Response to Submissions for the draft Notice to Vary, the ԭ provided its preliminary view is that removing the concepts of Reference Offers and Non-Reference Offers, in favour of reliance on the proposed product withdrawal conferral of power, could vastly simplify the operation of the SAU. The ԭ sought interested parties views on this proposal. Submissions provide the following views: NBN Co supports removing the concepts of Reference Offers and Non-Reference Offers, and proposes drafting to implement these changes which NBN Co states replicate the commitment to keep fixed in nominal terms until 30 June 2017 the Maximum Regulated Prices of what would otherwise have been Reference Offers. CCC supports the proposal, so long as the areas where the distinction makes a material difference remains. iiNet submits that while in principle it could support the removal of the concepts of Reference Offers and Non Reference Offers in order to simplify the SAU, it could not do so if this would result in the removal of the commitment not to increase prices for Reference Offers before 1 July 2017 or the removal of any other commitment made in respect of Reference Offers. AAPT supports the removal of the concepts of Reference Offers and Non-Reference Offers to the extent that it removes ambiguity and complexity around whether products can or cannot be withdrawn; however it does not support their removal altogether until a review of the SAU has been undertaken to ensure that such a distinction is not material and necessary for the proper operation of other provisions. In Optus submission: Optus states that the issues with the product withdrawal provisions have been addressed to some extent with the conferral of power on the ԭ to disallow a product withdrawal, provided that this power remains unconstrained.  Optus states that it is not opposed to the requirement for NBN Co to specify a suite of Reference Offers, in order to set suitable price anchors for the introduction of future prices. However, it notes that there is a risk that a Non-Reference Offer may be subject to product withdrawal during the relevant regulatory term. Optus considers that it is important that the composition of the Reference Offers in Module 1 (and any subsequent replacement modules) be designed to represent the products required by Access Seekers to provide entry-level residential and business grade services to end-users. The ԭ has considered the views from submissions and has decided to implement the proposal to remove the concepts of Reference Offers and Non-Reference Offers in the Notice to Vary. To implement these changes, the Notice to Vary adopts the drafting proposed by NBN Co in its submission with some minor amendments. The implications of these proposed changes to the SAU are as follows: NBN Co will be required to supply NBN Offers. The initial suite of NBN Offers is listed in the SAU and includes the same Products, Product Components, Product Features, Ancillary Services and types of Facilities Access Services (or combinations thereof) that were previously specified as Reference Offers and Non-Reference Offers. NBN Co may develop new NBN Offers in accordance with the product development provisions set out in Schedule 1I and 2D. NBN Co may withdraw any NBN Offer throughout the SAU term (including the NBN Offers that were previously specified as Reference Offers) in accordance with the product withdrawal provisions set out in Schedule 1I and 2D, with the following conditions: NBN Co must provide notice that it intends to withdraw the Products, Product Components, Product Features, Ancillary Services and types of Facilities Access Services contained within the NBN Offer; and the ԭ may object to and disallow the withdrawal of the relevant Products, Product Components, Product Features, Ancillary Services and types of Facilities Access Services, having regard to the long-term interests of end-users and certain factors listed in the SAU. The Maximum Regulated Prices that applied to Reference Offers and Non-Reference Offers in the 18 December 2012 SAU will continue to apply to the NBN Offers. This means that the maximum prices of NBN Offers that were previously specified as Reference Offers will be fixed in nominal terms until 30 June 2017, and the maximum prices of all other NBN Offers will not be greater than the individual price control limit. The ԭ considers that the drafting adopted in the Notice to Vary to remove the concept of Reference Offers and Non-Reference Offers, combined with the operation of the product withdrawal disallowance power, will simplify the drafting and operation of the SAU. The ԭ also considers that the drafting adopted in the Notice to Vary will address concerns raised by submissions about removing the concept of Reference Offers and Non-Reference Offers, namely that: the pricing commitments that apply to Reference Offers and Non-Reference Offers will apply to NBN Offers; and the ԭ can ensure the ongoing supply of any NBN Offer over the SAU term, if it is in the long-term interests of end-users to do so, including entry-level residential and business grade services. Product variations As well as the development of new products and the withdrawal of existing products, Schedules 1I and 2E of the 18 December 2012 SAU also applies to variations made by NBN Co to its existing products. The draft Notice to Vary did not propose any changes to these clauses in the SAU. Upon further consideration, the ԭ considers that NBN Cos ability to make material variations to its products could allow NBN Co to bypass the intention and operation of the product withdrawal disallowance power. This may lead to circumstances where the SAU does not promote the long-term interests of end-users. For example, if NBN Co were to reduce the service quality or functionality of lower-functionality and lower-value products, this could mean that the SAU would not ensure that: NBN Co has incentives to price its services in such a way as to promote take-up of higher-functionality services and in turn promote efficient use of the NBN (this is because NBN Co could reduce the service quality or functionality of lower-functionality products to artificially promote take-up of higher-functionality products rather than through pricing its higher-value services efficiently); and current consumers of services provided over copper and HFC networks are not made worse off as a result of the transition to the NBN, and that in turn those consumers that desire and are willing to pay for services that offer greater functionality than currently available over copper and HFC contribute more to the recovery of the costs of the NBN upgrade than those that do not desire such services. As noted in the Draft Decision, the ԭ considers that if these outcomes were to be delivered by the SAU, economically efficient use of and investment in the NBN would more likely be encouraged. In light of these views, the Notice to Vary proposes a new clause in Schedule 1I and 2D which states that: NBN Co will not vary any Product in a manner that changes the functionality, performance or features of that Product to such an extent that results in the Product no longer being reasonably capable of delivering at least the same functionality, performance or features previously associated with the Product. If NBN Co wishes to vary the Product to such an extent that results in the Product is no longer reasonably capable of delivering at least the same functionality, performance or features, NBN Co will seek to withdraw the Product and introduce a new Product in accordance with Schedule 1I or 2D. Additional variations proposed by Telstra In in its submission to the Draft Decision and Consultation Paper on the draft Notice to Vary, Telstra proposed a number of additional variations to the product withdrawal provisions in the 18 December 2012 SAU in relation to the transitional arrangements that NBN Co will put in place when it withdraws a product. Submissions provide the following views: NBN Co agreed to adopt the additional variations proposed by Telstra and proposed drafting to implement the proposals. Telstra proposed SAU drafting to implement its proposals. AAPT supports the additional variations proposed by Telstra. Optus submits that Telstras proposal should to some extent be adopted. (Optus do not elaborate on what aspects of Telstras proposal should or should not be adopted.) The Notice to Vary proposes drafting to implement Telstras proposal that NBN Co should be required to provide the following minimum information to the ԭ, access seekers and Consumer Advocacy Groups in respect of a product that it intends to withdraw: NBN Cos assessment of the factors that it is required to have regard to when considering withdrawing a product; and the following information about NBN Cos proposed transitional arrangements for migration to an alternative product: the proposed alternative product; the proposed timeframes for migration to that alternative product; the proposed testing arrangements for the alternative product; the details of any trails or transition processes for the alternative product; and if NBN Co will not offer an alternative product, NBN Cos reasons for not doing so. The ԭ has largely adopted the drafting proposed by NBN Co in its submission to implement Telstras proposals. Maximum Regulated Prices The variations that are discussed in this section relate to the issues discussed in section 5.4 of the Draft Decision, section 2.4.1 of the Consultation Paper, section 2.4.1 of the Response to Submissions, and Schedules 1C, 1G, 2B and 2E of the Notice to Vary. An important aspect of the Notice to Vary is the role of Maximum Regulated Prices. Maximum Regulated Prices set the maximum Price that NBN Co may chargewere NBN Co to charge a Price higher than the Maximum Regulated Price, it may be in breach of the SAU (subject to that higher Price not having been agreed between NBN Co and an access seeker(s)). A number of initial Maximum Regulated Prices are set out in the Notice to Vary. Further, the Notice to Vary permits the ԭ to determine initial Maximum Regulated Prices (subject to certain conditions) for NBN Offers and Other Charges: where the Maximum Regulated Price currently specified in the Notice to Vary is zero; or where there is currently no Maximum Regulated Price specified in the SAU. The Notice to Vary also establishes how initial Maximum Regulated Prices, once set, are able to change over time via the CPI-1.5percent price control, a revenue neutral rebalance or in response to a tax change event. Also of relevance, once the Building Block Revenue Period commences, NBN Co must determine its Prices such that the revenues that it expects to earn do not exceed the forecast Annual Building Block Revenue Requirement (ABBRR). This section of the document discusses the variations in the Notice to Vary relating to these matters and is structured as follows: Section  REF _Ref368922857 \r \h 5.1 discusses some overarching issues with respect to the pricing provisions in the SAUfirstly the interaction between Maximum Regulated Prices, Prices and the Long Term Revenue Constraint Methodology and secondly, the re-opening mid regulatory cycle of the ABBRR in response to particular Maximum Regulated Price change events. Section  REF _Ref368922868 \r \h 5.2 discusses variations relating to the initial Maximum Regulated Prices set out in the SAU, and those relating to setting initial Maximum Regulated Prices for new NBN Offers and Other Charges and to introducing a Maximum Regulated Price for previously zero-priced NBN Offers and Other Charges. Section  REF _Ref368922875 \r \h 5.3 discusses the variations relating to how the Maximum Regulated Prices in the SAU will change over timein particular, the periodic revenue neutral review of Maximum Regulated Prices and how Maximum Regulated Prices may change in response to Tax Change Events. Overarching issues This section discusses three overarching issues with respect to the Maximum Regulated Price provisions in the SAU. Two of these issues arise due to the combined operation of the approach to regulating Maximum Regulated Prices and the Long Term Revenue Constraint Methodology. It is intended by NBN Coand the ԭ accepts this proposed operationthat: Whilst NBNCo is in the Initial Cost Recovery Account phase of the Long Term Revenue Constraint Methodology, even if setting Prices up to the maximum allowed by the CPI-1.5percent price control prevented NBNCo from earning enough revenue to recover its accumulated revenue shortfalls, NBN Co would still not be able to increase Prices above the Maximum Regulated Prices allowed for by the CPI-1.5percent price control, subject to the effect of any price review arrangement or regulatory determination. Similarly, during the Building Block Revenue Period of the Long Term Revenue Constraint Methodology, it is intended that NBN Co is not permitted to increase Prices above the Maximum Regulated Prices allowed for by the CPI-1.5 per cent price control in order to expect to be able to earn revenues calculated in accordance with the forecast ABBRR. Whilst NBNCo is in the Building Block Revenue Period phase of the Long Term Revenue Constraint Methodology, its Prices will be set to only allow it to recover its forecast Annual Building Block Revenue Requirementso, if setting Prices up to the maximum level allowed by the CPI-1.5percent price control were to allow NBN Co to earn more than its forecast Annual Building Block Revenue Requirement, NBN Co would be required to set Prices below those allowed for by the price control in order to reduce its revenues and comply with the forecast ABBRR. The operation of the CPI-1.5 per cent price control differs from the operation of price caps in certain other regulatory regimes. In particular, the price control is fixed for the duration of the SAU. In comparison, in certain other regulatory regimes price caps remain fixed only over the regulatory period and are set so as to recover the revenue requirement, determined in accordance with a building block methodology. The operation of the CPI-1.5percent price control, fixed for the duration of the SAU, is intended to complement other aspects of the SAU and NBN Cos operating environment to provide incentives for NBN Co to invest in infrastructure and incur expenditure in an efficient manner. The combination of the large initial capital outlay by NBN Co, initial under-recovery and uncertainty about future demand and revenue, with the price controls which limit NBN Cos ability to increases prices, means that NBN Co is likely to face strong incentives to be efficient. However, the operation of the CPI-1.5percent price control, in combination with the Long Term Revenue Constraint Methodology, also creates some unique issues. Section  REF _Ref368922899 \r \h 5.1.1 discusses issues with the clauses in the Notice to Vary that specifically describe and establish how Maximum Regulated Prices, Prices and the Long Term Revenue Constraint Methodology operate together. Section  REF _Ref366663334 \r \h 5.1.2 discusses NBN Cos proposals to re-open the ABBRR in particular circumstances. Thirdly, the ԭ has made amendments to clause 1C.1.2 to clarify that NBN Co must supply the NBN Offers referred to in clause 1C.3 from the SAU Commencement Date. In the absence of this clause, the ԭ is concerned that that there would be no commitment by NBN Co to supply those NBN Offers referred to in clause 1C.3. However, the ԭ has exempted some CVC tiers from this requirement because NBN Co has indicated that it will not be in a position to provide those CVC tiers from the SAU Commencement Date. Interaction between Maximum Regulated Price, Prices and the LTRCM In the drafting that NBN Co provides with its submission, NBN Co has made variations which provide that NBN Co may set prices up to or equal to the Maximum Regulated Price. The ԭ considers that this creates some uncertainty as to whether, during the Building Block Revenue Period, the right established by these clauses to set prices up to or equal to the Maximum Regulated Price takes precedence over the obligation on NBN Co to determine Prices in such a manner that its forecast revenue equals the forecast Annual Building Block Revenue Requirement. In such a case, NBN Co might be able to earn total revenues greater than the sum of those allowed for by the Annual Building Block Revenue Requirements, by over-recovering revenues in each year until the final regulatory cycle of the SAU term. As noted in the Response to Submissions, the ԭ considers that it is necessary for the SAU to be absolutely clear about this matter. This is because it is essential to: the incentives created by the CPI-1.5percent price control for NBNCo to invest, operate and price efficientlyif NBN Co expected that it would be able to increase Prices above the Maximum Regulated Prices allowed for by the CPI-1.5percent price control, this would dull the positive incentive properties created by the price control; and the efficacy of the constraint on revenues established by the Annual Building Block Revenue Requirements and the Long Term Revenue Constraint Methodologyif the CPI-1.5percent price control allowed NBN Co to earn revenues in excess of those allowed for by the ABBRR, the Long Term Revenue Constraint Methodology would not operate to ensure that the net present value of NBNCos cash inflows and outflows over the life of the SAU came to zero. In the Notice to Vary, the ԭ has therefore included the following amendments to address its concerns about this matter: clarifying that NBN Co must set prices subject to both Maximum Regulated Prices and the revenue constraint by amending the drafting in clauses 1C.1.4, 1E.2.4(c), 2B.1.4 and 2C.6.2 of the Notice to Vary. including a new clause (clause 2C.6.2 of the Notice to Vary) to ensure that, over a regulatory cycle within the Building Block Revenue Period (or that part of a regulatory cycle that is within the Building Block Revenue Period), prices are set so that NBN Cos forecast revenue does not exceed its allowed revenues. Re-opening the LTRCM in response to Maximum Regulated Price change events As noted above, the operation of the CPI-1.5 per cent price control differs from price cap mechanisms in certain other regulatory regimes. This is because the price control is fixed for the duration of the SAU and the price caps that result from the operation of the price control are not varied for the purpose of allowing the access provider to expect to earn revenues during the forthcoming regulatory period that are determined in accordance with a building block methodology. In the draft Notice to Vary, and as discussed further below, the ԭ proposed that Maximum Regulated Prices may be able to be changed during a regulatory cycle in response to: a periodic revenue neutral review (that is, a Price Review Arrangement coming into effect); a Tax Change Event; and/or the ԭ determining a Maximum Regulated Price for a new Offer or Other charge, or a previously zero-priced Offer or Other Charge. In its submission, NBN Co proposes to include a new provision in the SAU which relates to the operation of the Long Term Revenue Constraint Methodology in Module 2. The new provision would allow for the Forecast Nominal ABBRR, Forecast Real Annual Building Block Revenue Requirement and Annual Forecast Revenue for a regulatory cycle to be adjusted to account for the incremental effects of a Price Review Arrangement or a Regulatory Determination of a new Maximum Regulated Price on those forecast amounts. According to NBN Cos proposal, any necessary adjustments would be specified in the relevant Regulatory Determination or relevant Price Review Arrangement. NBN Co notes that the above mentioned forecasts are relevant to the calculation of the Initial Cost Recovery Account at the end of each year. The ԭ considers that it is difficult to ascertain now the extent to which costs and revenues may be expected to change over the relevant regulatory cycle in response to a price review arrangement or a regulatory determination of a new maximum regulated price. A price review arrangement or a regulatory determination of a new maximum regulated price in Module 2 may involve no changes in expected costs or revenues. However, there may be cases where a price review arrangement or a regulatory determination of a new maximum regulated price would be expected to have a material impact on costs and revenues over the relevant regulatory cycle. NBN Cos forecast nominal ABBRRs (which represent NBN Cos annualised costs) will be set up-front before each regulatory cycle. Forecast revenue will also be set up-front if forecast revenues are used to determine unrecovered cost and the roll-forward the ICRA (this is discussed further in section  REF _Ref368922982 \r \h 6.3.2). If a price review arrangement or a regulatory determination of a new maximum regulated price is expected to materially change NBN Cos expected revenues and costs, continuing to use the forecasts of costs and revenues determined through the replacement module process may result in NBN Co being under or over compensated. The ԭ therefore considers that a mechanism that allows for the re-opening of forecasts is appropriate. The ԭ considers that NBN Cos proposed re-opening mechanism is appropriate and has adopted it in the Notice to Vary, subject to two minor drafting amendments. The first amendment is to require that adjustments made under these provisions will be made to the extent the ԭ considers necessary, rather than to the extent necessary. The second amendment is to require that the adjustments made under the provisions account for any effects on the forecast amounts, rather than the incremental effects. Initial Maximum Regulated Price setting This section of the document discusses the views expressed in submissions about the initial Maximum Regulated Prices set out in the draft Notice to Vary. It also discusses the variations in the Notice to Vary that relate to the approach to setting initial Maximum Regulated Prices for new NBN Offers and Other Charges, and those that relate to introducing a Maximum Regulated Price for previously zero-priced NBN Offers and Other Charges. Initial Maximum Regulated Prices currently set out in the SAU Submissions raised a limited number of issues with respect to the Maximum Regulated Prices currently specified in the SAU. John de Ridder reiterates the concerns about CVC pricing that he raised in his submission to the Consultation Paper on the Notice to Vary. That is: that CVC pricing discriminates against small access seekers; that CVC pricing has the same effect as volume discounting; that there would be no discrimination if CVC pricing was per GB (not sold in blocks); that transitory CVC credits do not remove the barrier to entry for small access seekers; and that the difference in the cost of CVC capacity is not in the long-term interests of end-users. These concerns were addressed by the ԭ in section 2.4.1.1 of its Response to Submissions. John de Ridders submission has not provided any additional information that has not already been considered by the ԭ. The ԭ has therefore not proposed any changes in the Notice to Vary in relation to John De Ridders most recent submission. iiNet submits that the Multicast AVC Offer and the Multicast Domain Offer should be removed from the SAU, because this would allow access seekers and NBN Co further time to negotiate multicast prices and, if agreement cannot be reached, for access seekers to seek an Access Determination from the ԭ. In contrast, in the Draft Decision on the 18 December 2012 SAU, the ԭ noted that the initial Maximum Regulated Prices for multicast services were likely to be efficient due to a number of factors that were likely to constrain or anchor NBN Cos multicast pricing. The ԭ concluded that in the absence of additional information about why the initial Maximum Regulated Prices for multicast functionality were not reasonable, its preliminary view was that multicast initial Maximum Regulated Prices were reasonable. In the draft Notice to Vary, the ԭ did not propose any variations to the initial Maximum Regulated Prices for multicast, as submissions to the Draft Decision did not provide any additional information that had not already been considered in making the Draft Decision. The ԭ notes that, in order to demonstrate its concerns about Maximum Regulated Prices for multicast services, iiNet provides confidential cost modelling comparing the additional costs it faces to deliver Fetch services to its customers with the additional costs that would apply to deliver the service if NBN Cos multicast services were used. The ԭ considers that this information shows that it would cost more to deliver Fetch services using NBN Cos multicast services than it costs to deliver via On Net DSL. However, the ԭ notes that there are alternative products to multicast that are supplied by NBN Co that can be used to supply content services to end-users. In addition, access seekers may be able to negotiate different multicast prices with NBN Co. iiNet also submits that if NBN Cos multicast prices are accepted by the ԭ for inclusion in the SAU, NBN Co may seek to use this as a justification not to lower the prices in the future even if a compelling case is made for them to be lowered. The ԭ noted in the Draft Decision that NBN Co could, at a future time, reduce multicast prices to encourage take-up if it so chose. The ԭ acknowledges that NBN Co may not always face incentives to respond to market developments in this wayif this were the case, the ԭ could review the Maximum Regulated Prices for multicast via the Price Review Mechanism (see section  REF _Ref368985684 \r \h 5.3.1 below). The content services that NBN Cos multicast product is designed around are still in a relatively nascent state. If over time market conditions and the evolution of content services are such that the Maximum Regulated Prices for multicast services are no longer reasonable, the ԭ will be able to review them via the Price Review Mechanism (see section  REF _Ref368985684 \r \h 5.3.1 below). Optus states that it still has concerns over the appropriateness of the starting prices of many of the NBN product components, and the suitability of the components to be used by retail service providers to supply a retail service that replicates existing service levels at existing price points. Optus submits that the ԭ should place greater weight on the views of RSPs, rather than NBN Co when assessing whether the prices in the SAU are likely to enable retail prices that promote the long-term interests of end-users. The ԭ notes that, when assessing the reasonableness of NBN Cos maximum regulated prices, it must balance the legitimate business interests of NBN Co and access seekers. Optus latest submission has not specified which prices it is concerned about in the SAU, and has not provided the ԭ with evidence to support its submissions. Further, Optus has not responded to the ԭs analysis in its Response to Submissions or NBN Cos analysis in its submission to the Consultation Paper on the Notice to Vary. In the absence of this information, the ԭ has not proposed any changes to NBN Cos initial maximum regulated prices in the Notice to Vary in response to Optus submission. Additional NBN Offers and Maximum Regulated Prices The Notice to Vary includes the following additional products, product components, product features, Ancillary Services or types of Facilities Access Service in Schedule 1C as an NBN Offer: NBN Co Building Entry Service. CVC TC-4: 1100, 1200, 1300, 1400, 1500, 1600, 1700, 1800, 1900 Mbps and 2 Gbps. These products have been included at the request of NBN Co. Additional information about these products, and the reasons for including them as NBN Offers in the Notice to Vary, are discussed below. NBN Co Building Entry Service The NBN Co Building Entry Service is a type of Facilities Access Service. This service allows an access seeker to connect fibre optic cables from a physical location outside an NBN Co site or facility to an ODF Termination Point or another agreed location within an NBN Co facility. This service is defined in clause 1A.7 of the Notice to Vary as: NBN Co building entry service, which enables an Access Seeker to install, house, operate, test, maintain and remove lead-in or backhaul transmission cables at a POI Site that is located within a Type 1 Facility (NBN Co Building Entry Service). The price for the NBN Co Building Entry Service is set out in clause 1C.3(g) of the Notice to Vary, and is $190 per month per fibre cable. The ԭ understands that this $190 per month price for the NBN Co Building Entry Service is based on NBN Cos understanding of the market rates for similar product elements that would provide access seekers with the same capability as this service, as well as based upon the cost associated with building this service. The ԭ has not received evidence from NBN Co in support of these market rates or the relevant costs. The NBN Co Building Entry Service has been included in NBN Cos Wholesale Broadband Agreement (WBA) since February 2013 and is currently being supplied by NBN Co. The ԭ has included the NBN Co Building Entry Service in the Notice to Vary because specifying this product as an NBN Offer will ensure that the Maximum Regulated Price of this product will be determined in accordance with the provisions in Schedule 1C and 2B of the Notice to Vary. As discussed in section  REF _Ref368661873 \r \h 4.1.4, the NBN Co Building Entry Services has also been included in Attachment D (Initial Products), which means that this product will be exempt from further consultation through the PDF Processes. CVC TC-4 The 18 December 2012 SAU includes CVC TC-4 up to 1 Gbps at individual tiers of between 50 Mbps and 100 Mbps. The price for CVC TC-4 is $20 per Mbps per month (which means that the total cost is calculated by multiplying $20 times the amount of Mbps of CVC purchased). The additional CVC TC-4 tiers requested by NBN Co extend these tiers up to 2 Gbps with individual increments of 100 Mbps. The price for these additional tiers remains at $20 per Mbps per month. The ԭ understands that NBN Co intends to release these additional CVC tiers commercially by the end of 2013. NBN Co has also stated that a reason for releasing these additional CVC tiers is to support the release of additional AVC tiers, such as 1 Gbps. The ԭ has included these additional CVC TC-4 tiers in the Notice to Vary because: the initial price of these tiers are likely to be reasonable because they are the same as the existing CVC tiers in the SAU ($20 per Mbps per month); and specifying these products as NBN Co Offers will ensure that the price of this product will be subject to the individual price control limit and the price review mechanism in the SAU immediately upon its release. As discussed in section  REF _Ref368661873 \r \h 4.1.4, these additional CVC TC-4 tiers have also been included in Attachment D (Initial Products), which means that these specific product features will be exempt from further consultation through the PDF Processes. Minor variations to Schedules 1C and 2B submitted by NBN Co In its submission, NBN Co proposed a number of minor variations to Schedules 1C (NBN Offers and Other Charges) and 2B (Pricing Commitments). The ԭ considers that most of these minor variations have no impact on the ԭs consideration of whether the SAU satisfies the statutory criteria for acceptance of an SAU under Part XIC, and has therefore adopted most of the variations in the Notice to Vary. However, the ԭ notes the following in relation to the effects of removing the Standard Business Offer and the maximum regulated price for a Subsequent Installation. Firstly, as discussed in section  REF _Ref368985837 \r \h 4.2.1, the concept of reference offers has been removed in the Notice to Vary. As a consequence of this variation, NBN Co has proposed to no longer supply (as a bundle) the reference offer that was defined as the Standard Business Offer (SBO). The maximum regulated price for the SBO was $53, and the SBO included: a 25/10Mbps AVC PIR (TC-4), including: access to, and use of, one available UNI-D; and the option to use one available UNI-V; and a symmetric access capacity 500kbps CIR (TC-1) AVC. Under the drafting provided in NBN Cos submission, access seekers would still be able to purchase the above product features; however, they would be required to purchase product features (i) and (ii) separately. The maximum regulated prices for these product features in the drafting provided in NBN Cos submission are $30 and $33, respectively. That is, the effective Maximum Regulated Price appears to be $10 higher than under the draft Notice to Vary. However, NBN Cos WBA Price List sets out a mechanism through which access seekers who purchase a symmetric access capacity AVC (TC-1) in conjunction with an asymmetric AVC (TC-4) will receive a credit equivalent to the recurring charge for 0.15 Mbps TC-1 (CIR) data transfer rate. The WBA Price List specifies a charge for this service of $10 per month. Therefore, based on the WBA Price List, if an access seeker was to purchase services (i) and (ii) above, the total cost to the access seeker would be $53 ($30+$33-$10) per month. In its 6 September 2013 submission, NBN Co proposed drafting to include this pricing credit mechanism in the SAU. However, the ԭ is not satisfied that this pricing credit alone will ensure that access seekers will be able to purchase what was previously defined as the SBO for $53. This is because the value of the pricing credit is directly linked to the actual Price for a 0.15Mbps AVC (TC-1), rather than the Maximum Regulated Price for this service. This means that if NBN Co sets the Price for the 0.15Mbps AVC (TC-1) below the Maximum Regulated Price (currently $10), the value of the pricing credit provided to access seekers will fall, leading to an effective Price for the previous SBO bundle that is greater than $53. It is not clear why removing the concept of reference offers requires NBN Co to no longer supply the SBO. To ensure that the effective Maximum Regulated Price for the previous SBO bundle reflects that which was consulted on via the original consultation on the SAU and the draft Notice to Vary, in the Notice to Vary the ԭ has re-introduced the SBO as an NBN Offer, described as: an Asymmetric AVC Offer with the following Data Transfer Rates: 25 Mbps PIR (TC-4) downlink; and 10 Mbps PIR (TC-4) uplink; and a Symmetric Access Capacity Offer with a symmetrical Data Transfer Rate of 0.5 Mbps CIR (TC-1). The maximum regulated price for the SBO will be $53 per SIO, per month until 30 June 2017. After this date, consistent with other NBN Offers, the maximum regulated price will be determined in accordance with clauses 1C.5 and 2B.2. Regarding the 0.15Mbps AVC (TC-1) pricing credit mechanism, the ԭ considers that including this mechanism in the SAU will promote efficient use of the network because it will encourage access seekers to take up Symmetric Access Capacity Offers (TC-1), where the value they place on these offers outweighs the associated cost. Further, including the pricing credit mechanism in the SAU will provide access seekers with certainty over the continuation of the pricing credit mechanism for the duration of Module 1. However, NBN Cos proposed drafting of the pricing credit mechanism is ambiguous in terms of when the credit will apply and what the value of the credit will be. Therefore, the Notice to Vary includes amended drafting in a new clause 1C.4.4 to give effect to NBN Cos proposed pricing credit mechanism. Secondly, clause 1C.4.2(a) of NBN Cos revised drafting specifies the maximum regulated price for a subsequent installation. A subsequent installation is defined as a standard or non-standard installation that is not the first installation performed by NBN Co (or an installer) in respect of a premise. In the drafting provided as part of its submission, NBN Co has varied the charge description for a subsequent installationthe charge is specified as $270 plus Hourly Labour Rate plus cost of materials, charged for a minimum amount equivalent to 3.67 hours, whereas it was previously defined as $270 plus Hourly Labour Rate plus cost of materials. NBN Co submits that the rationale for this variation is that a subsequent installation was previously subject to a minimum charge of $270, which translates to 3.67 hours at the current Hourly Labour Rate of $75 per hour. That is, it appears that NBN Cos intention was to clarify that the minimum charge of $270 was simply equivalent to 3.67 hours of labour. The ԭ understands the intent of NBN Cos proposed variation but considers that its proposed drafting is unclear and could be interpreted to mean that access seekers will be charged $270 plus the Hourly Labour Rate (for a minimum of 3.67 hours) plus the cost of materials. Therefore, the Notice to Vary sets out that the charge for a subsequent installation is defined as the Hourly Labour Rate charged for a minimum amount equivalent to 3.67 hours, plus cost of materials. Setting initial Maximum Regulated Prices for new and previously zero-priced offers and other charges This section commences by explaining broadly the intended operation of the provisions in the draft Notice to Vary and the Notice to Vary relating to the ԭs ability to determine initial Maximum Regulated Prices for new Offers and Other Charges, and previously zero-priced Offers and Other Charges. It then addresses how the views expressed in submissions to the draft Notice to Vary in relation to these provisions have been taken into account in finalising the Notice to Vary. By way of background, the ԭ notes that its ability to determine initial Maximum Regulated Prices that are not commercially agreed or specified in the SAU arises due to the normal operation of Part XIC. The variations in the Notice to Vary are aimed at clarifying the ԭs oversight role under Part XIC for initial Maximum Regulated Prices that are not specified in the SAU and cannot be agreed. In the absence of a variation to do this, the SAU may otherwise preclude the ԭ from ever being able to determine initial Maximum Regulated Prices for any new product or other charge, or currently zero-priced offer or other charge, despite the fact that these initial Maximum Regulated Prices may not be able to be agreed or may otherwise be set by NBN Co at levels that are not reasonable. The ԭ reiterates thatwhile the ԭ recognises the potential for NBN Co to face positive incentives at certain stages during the proposed SAU termthe ԭ should have the ability to reset the Maximum Regulated Prices if the initial prices set by NBN Co are not reasonable. Having said this, if NBN Cos observed behaviour indicates the desired impact of the aforementioned positive incentives, the ԭ expects that it would not be necessary for it to determine initial Maximum Regulated Prices. That is, modifying the SAU so that the ԭ is not prevented from doing so does not necessarily mean that the ԭ should or must intervene in relation to initial Maximum Regulated Prices, even if not commercially agreed. The ԭ also reiterates that, in the event that it did need to address this issue through its existing Part XIC powers, the ԭ would be required to have regard to NBN Cos legitimate business interests. Intended operation of the provisions According to the Notice to Vary, it is intended that NBN Co and access seekers will, in the first instance, negotiate over the initial Price of new Offers and Other Charges, and previously zero-priced Offers and Other Charges. If NBN Co and access seekers agree to an initial Price, that Price becomes the initial Maximum Regulated Price. This is set out in clauses 1C.5.1 and 2B.2.2, which (broadly) state that, in a given Financial Year, if the ԭ has not made a regulatory determination in relation to the Maximum Regulated Price of a new Offer/Other Charge, or a previously zero-priced Offer/Other Charge, the Maximum Regulated Price will be the Price introduced by NBN Co. In addition, clauses 1C.5.4(b)(i) and 2B.3(b)(i) permit NBN Co to introduce a Price for a zero-priced Offer/Other charge by providing no less than 6 months notice to access seekers and the ԭ of its intention to introduce a Price for the Offer/Other Charge. However, it is intended thatin the event that agreement cannot be reached on the Price that NBN Co wishes to introducethe ԭ will be able to determine the Maximum Regulated Price in a Binding Rule of Conduct and/or Access Determination. As set out in clauses 1C.5.1 and 2B.2.2, it is intended that the Binding Rule of Conduct or Access Determination must have particular characteristics in order for it to set the Maximum Regulated Price. Firstly, the Binding Rule of Conduct or Access Determination must be made within 24 months of NBN Co commencing supply of the new Offer or Other Charge, or introducing a Price for the zero-priced Offer or Other Charge. This constraint is intended to provide NBN Co with certainty that the ԭ may not intervene in respect of new prices following this 24 month time period. Further, after the 24 month period, any issues about the pricing of such a product are likely to be more appropriately addressed through a revenue neutral price review. Secondly, where the regulatory determination in question is an Access Determination, and it is made in relation to the Maximum Regulated Price of a new Offer or Other Charge, the ԭ must have taken into account the characteristics and costs of, and impacts on demand for and revenues earned from, other existing NBN Offers and Other Charges. This is intended to provide NBN Co with an explicit commitment from the ԭ that it will consider how a regulated price for a new product could impact upon NBN Cos existing and future revenue streams. The ԭ does not need to take into account these matters if the regulatory determination in question is a Binding Rule of Conduct, and it considers that due to the urgent need to make the Rules, it is not practicable to do so. It also does not need to take into account these matters in determining the initial Maximum Regulated Price of a previously zero-priced Offer or Other Charge. Once the initial Maximum Regulated Price is set (either by agreement between NBN Co and access seekers, or ԭ regulatory determination) the CPI-1.5 per cent price control will govern how the Maximum Regulated Price can change over time (subject to any later Price Review or Tax Change Event, and the forecast Annual Building Block Revenue Requirement during the Building Block Revenue Period). Submissions relevant to initial Maximum Regulated Prices for both newly introduced and previously zero-priced Offers and Other Charges NBN Cos submission notes the following points which are relevant to the setting of initial Maximum Regulated Prices for both newly introduced and previously zero-priced Offers and Other Charges: The SAU should clarify that the initial Maximum Regulated Prices set in a Regulatory Determination have effect from the date the ԭ made that Regulatory Determination until the end of the financial year in which the Regulatory Determination was made (or earlier if the ԭ makes a subsequent Regulatory Determination). The SAU should clarify that it is NBN Co, rather than the ԭ, who determines Prices for NBN Offers and Other Charges, including new Prices. This is to clarify that, while the ԭ may set the applicable Maximum Regulated Prices, it is NBN Co that sets the actual Prices (up to or equal to the applicable Maximum Regulated Price). The Initial Pricing Principles should be retained in the SAU to provide access seekers with transparency about how NBN Co sets the initial prices for new and previously zero-priced Offers and Other Charges. In relation to the first point, NBN Co has provided limited explanation of its proposed changes. The ԭs understanding is that NBN Co is seeking to preclude the ԭ from firstly, backdating Maximum Regulated Prices in Regulatory Determinations, and secondly, specifying multiple Maximum Regulated Prices for an Offer or Other Charge across multiple financial years (that is, a Maximum Regulated Price for year 1, a Maximum Regulated Price for year 2). The ԭ does not see strong reasons for or against NBN Cos proposed variations. On the one hand, it does not seem necessary to address particular ways that the ԭ may choose to exercise its statutory powers. The ԭ would already be required to take into account the matters specified by Part XIC (including NBN Cos legitimate business interests) that the ԭ must have regard to in making an Access Determination. On the other hand, the ԭ understands that NBN Co is seeking certainty over the scope of the effect of an ԭ determination. In this regard, the intended operation of clauses 1C.5.1(b), 1C.5.1(d), 2B.2.2(b) and 2B.2.2(d) in the Notice to Vary is that an ԭ determination resets on a once-off basis the level of a Maximum Regulated Price during the 24 month windowto the extent that the ԭ does not do so during this window, the CPI-1.5 per cent otherwise applies. Further, it may be acceptable in the current context to accept a restriction on the ԭs ability to backdate Maximum Regulated Prices, because the ԭ is able to rapidly specify a Maximum Regulated Price using Binding Rules of Conduct. Due to this ability to rapidly specify Maximum Regulated Prices in a Binding Rule of Conduct or an Interim Access Determination, the ԭ accepts that it is also necessary for clauses 1C.5.1(b), 1C.5.1(d), 2B.2.2(b) and 2B.2.2(d) to contemplate that multiple regulatory determinations for a new Offer or Other Charge may be made during the 24 month window. In particular, an Access Determination may follow Binding Rules of Conduct and/or an Interim Access Determination. For example, if the ԭ urgently issued Binding Rules of Conduct, it must commence an Access Determination inquiry, and may wish to adjust the Maximum Regulated Price in light of further information and analysis. The ԭ therefore accepts the objectives that NBN Co is seeking to achieve via its proposed variations. However, the ԭ has not adopted NBN Cos proposed drafting in the Notice to Varyrather it has included clauses 1C.5.1(b), 1C.5.1(d), 2B.2.2(b) and 2B.2.2(d), which each state that if the ԭ has made a Resetting Regulatory Determination in respect of that NBN Offer or Other Charge: the Price specified in that Resetting Regulatory Determination (which may be a Price of $0.00), with effect on and from the date on which that Resetting Regulatory Determination is made until the earlier of the end of that Financial Year and the date on which another Resetting Regulatory Determination is made in that Financial Year In relation to the second point submitted by NBN Co, in the draft Notice to Vary, because the ԭ proposed variations which were designed to permit the ԭ to determine Maximum Regulated Prices in certain circumstances,the ԭ also proposed consequential variations to the SAU to remove references to NBN Co determining initial prices and to remove clauses that purported to allow NBNCo to apply Other Charges at its discretion. However, the ԭ understands the distinction that NBN Co has raised between the ԭ determining Maximum Regulated Prices and NBN Co determining Prices. That is, the Maximum Regulated Price sets the price level that NBN Co must not determine a Price above; but it is ultimately NBN Co that determines the precise level of that Price (subject to it not being higher than the Maximum Regulated Price and it not leading to forecast revenues above the forecast ABBRR during the Building Block Revenue Period). The ԭ has therefore re-instated clauses which clarify that NBN Co determines Prices. However, for the reasons outlined in section  REF _Ref368922899 \r \h 5.1.1, it has not adopted NBN Cos proposed drafting with respect to allowing NBN Co to determine Prices up to and including the Maximum Regulated Price. Rather, the relevant clauses are described as NBN Co determining Prices subject to both Maximum Regulated Price and Building Block Revenue Requirement constraints. In relation to the third point submitted by NBN Co, in the draft Notice to Vary, the ԭ proposed the removal of the Initial Pricing Principles from the SAU. In light of the ԭs role in being able to determine initial Maximum Regulated Prices, the ԭ does not consider these principles to be necessary in order for the SAU to satisfy the statutory criteria. Further, some of the principles do not necessarily align well with the matters that the ԭ must take into account in making a regulatory determination under Part XIC, and could in turn cause some confusion as to the matters that are relevant to the determination of initial Maximum Regulated Prices under Part XIC. This is particularly the case in the context of the legislative hierarchy, whereby an Access Determination or Binding Rule of Conduct only has effect to the extent that it is consistent with the SAU. Lastly, the ԭ considers that the principles would be difficult, if not impossible, to effectively enforce in any event. Whist the ԭ appreciates NBN Cos desire to provide transparency, the ԭ does not consider that including unenforceable commitments in the SAU is the appropriate avenue for doing so. Should NBN Co wish to provide transparency as to the matters it will take into account in setting initial Maximum Regulated Prices, it could publish a statement on its website. Submissions about initial Maximum Regulated Prices for newly introduced Offers and Other Charges NBN Co submits that, when making a regulatory determination about the initial Maximum Regulated Price for a new Offer or Other Charge, the SAU should require the ԭ to be satisfied that the specified price for the Offer or Other Charge will not result in financial detriment to NBN Co compared to a situation in which NBN Co did not introduce the Offer or Other Charge. It states that, without this requirement, every time NBN Co introduces a new Offer or Other Charge there would be a risk that it could be made worse off (through ԭ intervention) than if it had not introduced the new NBN Offer or Other Charge. As a consequence, NBN Co may have mixed incentives to engage in ongoing product development. To give effect to this submission, NBN Co proposes the following clause be included in clauses 1C.5.1(d) and 2B.2.2(d) of the Notice to Vary: the ԭ has made a Regulatory Determinationfor the purposes of which, the ԭ is satisfied that the price for that NBN Offer or Other Charge will not result in financial detriment to NBN Co compared to a situation in which NBN Co did not introduce the NBN Offer or Other Charge Parties other than NBN Co did not submit in relation to the ԭs ability to determine initial Maximum Regulated Prices for new Offers and Other Charges. Whilst the ԭ understands the point that NBN Co makes in relation to this matter, the ԭ has not adopted NBN Cos proposed additional characteristic that a regulatory determination must have in order for that determination to set an initial Maximum Regulated Price. The ԭ has concerns that locking in the particular characteristic proposed by NBN Co for the 27year term of the SAU could lead to unintended or unforeseen consequences, which, at worst, could unduly preclude the ԭs ability to effectively exercise its powers to determine initial Maximum Regulated Prices. In particular, the meaning of financial detriment could be interpreted very broadly. If such circumstances arose, it would not be open to the ԭ or other parties to seek to amend the clause, even if it were leading to outcomes that were demonstrably not reasonable. The ԭ reiterates that, in making an Access Determination under Part XIC, the ԭ must take into account (amongst other things): whether the determination will promote the long-term interests of end-users which would require that the ԭ has regard to the extent to which the determination would result in the achievement of the objective of encouraging economically efficient use of and investment in the NBN; and NBN Cos legitimate business interests and its investment in the NBN. Further, as proposed in the draft Notice to Vary, a determination made by the ԭ will only set the Maximum Regulated Price if, in making the determination, the ԭ has taken into account the characteristics and costs of other NBN offers, and the demand for and revenues earned from, these other Offers. The requirement to take into account these matters is intended to provide NBN Co with certainty that, in determining an initial Maximum Regulated Price for a new Offer or Other Charge, the ԭ will consider the effects of that new Maximum Regulated Price on the revenues earned from its existing product set. This is in order to address NBN Cos concerns that the ԭ might set a new initial Maximum Regulated Price in such a way as to undermine its current and expected future revenue streams. It is therefore open to NBN Co at the time that the ԭ conducts an inquiry into making an Access Determination to make arguments and provide evidence about: the impacts of particular initial Maximum Regulated Prices for new Offers or Other Charges on its expected revenue streams; how particular initial Maximum Regulated Prices for new Offers or Other Charges impact upon its financial position, and how this is inconsistent with its legitimate business interests; and how particular initial Maximum Regulated Prices for new Offers or Other Charges would dissuade it from introducing the Offers or Other Charges, and how this would not promote efficient investment in and use of the NBN. The ԭ would then consider these arguments and this evidence on its merits at the time of the Access Determination inquiry. Were a particular initial Maximum Regulated Price to result in outcomes that were contrary to NBN Cos legitimate business interests, and/or which did not encourage efficient investment in and use of the NBN, it is highly unlikely that the ԭ would determine such a Maximum Regulated Price. For these reasons, the ԭ has not adopted NBN Cos proposed financial detriment clause in the Notice to Vary. Submissions about initial Maximum Regulated Prices for zero-priced offers and other charges In the draft Notice to Vary, the ԭ proposed that the SAU be varied to incorporate a New Price Disallowance Power, which would allow the ԭ to object to the introduction by NBNCo of a non-zero Maximum Regulated Price for Offers and Charges that are currently specified in the SAU as having a zero Maximum Regulated Price. This objection would have been able to take place after NBN Co had provided notice (of no less than 6 months) of its intention to introduce a non-zero Price. It was proposed that this power would extend to all Offers (that is, to both Non-Reference Offers and Reference Offers) and to all Other Charges (that is, including those associated with both Reference offers and Non-Reference Offers). In addition, the ԭ proposed variations that would allow it to determine the initial Maximum Regulated Price in respect of a previously zero-priced Offer or Other Charge, in the event that commercial agreement could not be reached on the Price. This meant that, if NBN Co were permitted by the ԭ to introduce a Price for a previously zero-priced offer or other charge, the actual Maximum Regulated Price would be established separatelyprimarily as agreed between NBN Co and access seekers, and failing agreement, determined by the ԭ. The ԭ also noted in the Response to Submissions that, whilst the ԭ considered the New Price Disallowance Power to be unobjectionable, there were questions as to its necessity in light of the variations that the ԭ was proposing to allow it to determine Maximum Regulated Prices for previously zero-priced Offers and Other Charges. In its submission, NBN Co states that: It shares the ԭs views as to the necessity of the New Price Disallowance Power, and therefore proposes amendments to remove it from the SAU. The preconditions and 6 month notice period for the introduction of a new price for a currently zero-priced offer or other charge should be retained, in order to provide access seekers with greater certainty about future pricing of currently zero-priced Offers or Other Charges. The proposed drafting submitted by NBN Co also re-introduces the clause which the ԭ had removed in the draft Notice to Vary which states that nothing in [clause 1C.5.4 of NBNCos submission] restricts NBN Co from introducing a non-Price term or condition in respect of an Other Charge to address the behaviours or circumstances described in clause 1C.5.4(b)(ii). These behaviours and circumstances are: that one or more Access Seekers use of the Offer or activity associated with the Other Charge results in additional costs to NBN Co or degraded service outcomes for other Access Seekers; and any other circumstance which makes it uneconomic for NBN Co to maintain the zero-price. NBN Co does not provide any arguments in support of the retention of this clause. Given that the Notice to Vary allows the ԭ to determine the initial Maximum Regulated Price of a previously zero-priced Offer or Other Charge (in the event that agreement cannot be reached over the Maximum Regulated Price between NBN Co and access seekers), the ԭ has not included the New Price Disallowance Power in the Notice to Vary. The ԭ has however, in line with NBN Cos submission, retained the clauses which require NBN Co to provide no less than 6months notice to access seekers and the ԭ of its intention to introduce a Price for a zero-priced Offer or Other Charge. On the other hand, in contrast to NBN Cos proposed drafting, the ԭ has not retained the clauses which list factors that NBN Co must be satisfied of in order to introduce a non-zero Price or Maximum Regulated Price. In line with the ԭs views outlined above in relation to the Initial Pricing Principles, the ԭ considers that these clauses would be difficult if not impossible to enforce. Whilst NBN Co considers that these clauses provide greater certainty to access seekers in regard to future pricing of currently zero-priced Offers and Other Charges, the ԭ does not consider that including unenforceable commitments in the SAU is the appropriate avenue for doing so. Should NBN Co wish to provide certainty to access seekers as to the matters it will take into account in deciding whether to introduce a non-zero Price, it could publish a statement on its website. Further, the ԭ has not re-introduced the clause which states that nothing in [clause 1C.5.4 of NBNCos submission] restricts NBN Co from introducing a non-Price term or condition in respect of an Other Charge to address the behaviours or circumstances described in clause 1C.5.4(b)(ii). The ԭ notes that this clause refers to a clause which, as outlined in the previous paragraph, the ԭ has now removed. The ԭ does not consider that the remaining clauses would preclude NBN Co from negotiating with access seekers to include non-price terms in Access Agreements to address the behaviours or circumstances described. iiNet submits that the ԭs power to issue a New Price Disallowance Determination should be retained and broadened to include a power to specify an alternative price to the one proposed by NBNCo. However, the ԭ considers that its ability to determine initial Maximum Regulated Prices under clauses 1C.5.1(b) and 2B.2.2(b) will allow it to determine a price which is different to that notified to access seekers and the ԭ by NBN Co. The ԭ has also included variations in the Notice to Vary to clarify that this determined Maximum Regulated Price can be zero. iiNet also submits that, given the complex issues that may need to be considered and the need for consultation with stakeholders, the ԭ should have discretion to extend the six month period in which to make a New Price Disallowance Determination when reasonably required. However, the ԭ notes that, under clauses 1C.5.1(b) and 2B.2.2(b), the ԭ has 24 months from the time the Offer or Other Charge ceases to be Zero-priced to make a determination which specifies a different Maximum Regulated Price to that notified by NBN Co. The ԭ considers that this will provide sufficient time to consider issues that arise, and to consult with stakeholders. Telstra submits that NBN Co should be required to commence consultation on the proposed prices for zero-priced items at the same time as it gives notice of its intention to introduce new prices. The ԭ considers that such a commitment is in line with the approach taken for consultation over the initial Prices for new offers (that is, that consultation must take place via the Product Development Forum) and is consistent with the ԭs desire for commercial negotiation to take place prior to any regulatory intervention. The ԭ has hence included clauses 1C.5.4(b) and 2B.3(b) in the Notice to Vary, which require NBN Co to provide at least 6 months notice to access seekers and the ԭ of its intention that (and reasons why) an NBN Offer or Other Charge cease to be zero-priced, and to consult with access seekers in relation to the proposal. The ԭ has also made minor amendments to clarify that the ԭ may make a Resetting Regulatory Determination in relation to a new price introduced by NBN Co for a previously zero-priced offer referred to in clause 1C.3 prior to 30 June 2017. In addition, the ԭ has made amendments to clarify what happens in a situation where a Maximum Regulated Price set out in clause 1C.3 was changed (prior to 30 June 2017) in the previous financial year as a result of NBN Co introducing a price for a zero-priced offer, the ԭ resetting the Price of a previously zero-priced offer or a tax change event. In these circumstances, the Maximum Regulated Price for the previous financial will continue to apply. That is, if a Maximum Regulated Price set out in clause 1C.3 is changed via one of the circumstances noted above, the new Maximum Regulated Price for that NBN Offer may not be increased via the Individual Price Increase Limit prior to 30 June 2017. Changes to Maximum Regulated Prices over time The 18 December 2012 SAU states that Maximum Regulated Prices for services that are Reference Offers will be subject to the CPI-1.5percent price control from year five of the SAU term onwards and Maximum Regulated Prices for Non-Reference Offers and Other Charges will be subject to the CPI-1.5percent price control from the first year of the SAU (or from the first year that NBN Co introduces them). In the draft Notice to Vary, the ԭ largely maintained this approach, but: consulted on whether removing the distinction between Reference Offers and Non-Reference Offers from the SAU would simplify the operation of the SAU; proposed that Maximum Regulated Prices be able to be changed during a Revenue Neutral Price Review by the making of a Price Review Arrangement; and proposed that Maximum Regulated Prices be able to be changed if changes to taxes occur, according to processes set out in the SAU. According to the draft Notice to Vary, in a given financial year, the Maximum Regulated Price of the Offer is if a Price Review Arrangement is in operation as per that Price Review Arrangement. If no Price Review Arrangement is in operation, then the Maximum Regulated Price is determined in accordance with the CPI-1.5 percent price control. The Maximum Regulated Prices established under the Price Review Arrangement and via the CPI-1.5 per cent price control may also be changed in accordance with the proposed Tax Change Events process during Module 1, and any subsequent process put in place during Module 2 for addressing tax change events. In the Notice to Vary, the ԭ has largely maintained this broad framework and drafting, but has made some further changes to address issues raised in submissions. The issues raised in submissions and changes made to the draft Notice to Vary are discussed below. Periodic revenue neutral review of Maximum Regulated Prices The periodic review of prices in the draft Notice to Vary was intended to operate as follows. Firstly, NBN Co or the ԭ may issue a notice to the other stating that they wish to commence a review of Maximum Regulated Prices, which Maximum Regulated Prices they consider should be reviewed and the reasons why. NBN Co would then have 120 days after the notice is issued to provide the ԭ with a proposal about how the particular Maximum Regulated Prices should be changed. The proposal would need to include a proposed Price Review Arrangement developed in accordance with the Price Review Criteria (and an explanation of how the proposed Price Review Arrangement is consistent with the criteria), as well as the forecasts (and underlying assumptions relating to those forecasts) used by NBN Co to apply the Price Review Criteria to the proposed Price Review Arrangement. The ԭ may then: accept the proposed Price Review Arrangement; or reject it and issue its own Price Review Arrangement; or discontinue the price review without making any decision on the proposed Price Review Arrangement. The ԭ is also able to issue a notice to NBN Co setting out variations to the Price Review Arrangement proposal which, if made, would allow NBN Co to re-submit a revised Price Review Arrangement proposal. (This is intended to be a similar power to the ԭs Notice to Vary power under Part XIC.) The ԭ must not accept a proposed Price Review Arrangement or issue an ԭ determined Arrangement unless it is satisfied that: the Maximum Regulated Prices in the Arrangement are reasonable (having regard to the maters specified in section 152AH of the CCA and any other matter the ԭ considered relevant); and there is no material difference between the expected total net revenues (that is, not just those relating to the particular Maximum Regulated Prices being reviewed) over the remaining term of the SAU with and without the Price Review Arrangement in operation. These two criteria are known as the Price Review Criteria. These criteria are intended to require that any changes to the Maximum Regulated Prices in question lead to reasonable Maximum Regulated Prices (having regard to the established criteria set out in section 152AH of the CCA) and that the changes do not leave NBN Co materially better or worse off in terms of their expected net revenues over the remaining term of the SAU. In addition, under the draft Notice to Vary, in deciding whether to accept or issue a Price Review Arrangement, the ԭ would have to take into account the characteristics and costs of other NBN offers not the subject of the review, and the demand for and revenues earned from, these other Offers. The requirement to take into account these matters is intended to provide NBN Co with certainty that, in deciding whether or not the Price Review Arrangement should come into effect, the ԭ will consider the effects of the arrangement on the revenues earned from its existing product set. This is in order to address NBN Cos concerns that the ԭ might change Maximum Regulated Prices in such a way as to undermine its current and future revenue streams. The ԭ could also take into account any other factor it considered relevant. If accepted, the proposed Price Review Arrangement would come into effectthat is, the prices set out in the Price Review Arrangement would become the Maximum Regulated Prices; if rejected and the ԭ issued its own Price Review Arrangement, that arrangement would come into effect. A Price Review Arrangement would need to specify its commencement date (which cannot be a date in which an existing Price Review Arrangement is in effect) and an expiry date. It also must specify the Offers to which the Price Review Arrangement applies and the associated Maximum Regulated Prices for one or more financial years within the period of the Price Review Arrangement. (The Maximum Regulated Prices may be different for each financial year of the Price Review Arrangement, for example, to establish a glide path of Maximum Regulated Prices.) According to the draft Notice to Vary, during Module 1, only one notification could be given by either NBN Co or the ԭ, and this could not be given before 1 July 2016. The associated Price Review Arrangement could not be made before 1 July 2018. During Module 2, notifications could be given at any time an existing Price Review Arrangement was not in operation, and Price Review Arrangements could have terms of between three to five years. Frequency of review during Module 1 As noted, the draft Notice to Vary set out that only one notification could be given by either NBN Co or the ԭ during Module 1, and that this could not be given before 1 July 2016. The associated Price Review Arrangement could not come into effect before 1 July 2018. In contrast, access seekers submit that the ԭ should not be prevented from implementing a price review arrangement prior to 1 July 2018; and that the ԭ should not be restricted to undertaking only one price review during the initial regulatory period. Access seekers argue that this is because: the prices specified in the SAU are largely untested; the telecommunications sector is dynamic in nature; NBN Cos activities are significant in scale and new and unique; three-year price reviews are consistent with Australian and international regulatory frameworks; the risks to the long-term interests of end-users arising from incorrect CVC pricing are likely to arise in the near termwithout a review of CVC prices, the risks facing access seekers will adversely impact their decisions to invest in NBN-based services; and access seekers will be required to either increase end-user prices or reduce service quality. Access seekers variously propose that: The ԭ should actively consider whether to conduct a price review every three years for the term of Module 1, with the consideration of the first review taking place in the period between the commencement of the SAU and 1 July 2016. The ԭ could have the discretion to initiate a review on a date not prior to 1 July 2015, and there should be the discretion for the ԭ to initiate subsequent reviews at least three years following the commencement of the initial review. A review should be able to be requested (either by access seekers, the ԭ or NBN Co) in circumstances which meet prescribed threshold criteria. Access seekers argue that these changes would: provide access seekers with some regulatory certainty during Module 1, particularly around CVC pricing; and allow for the appropriate allocation of risk between NBN Co and access seekers. Specifically in relation to CVC pricing, submissions note the following. Telstra submits that: The assumptions underpinning NBN Cos current CVC pricing are out-of-date and not reflective of the current experience on high bandwidth networks. Further, the current disparity between actual CVC requirements per end-user and NBN Cos current assumptions will increase significantly over the near term. If NBN Co does not reduce CVC prices in response to demand growth, RSPs will be required to either increase end-user prices or reduce service quality. Further, without a reduction in CVC prices, the likely outcome will be a reduction in NBN-based investment by RSPs. The risks to the long-term interests of end-users arising from the incorrect pricing of CVC are likely to arise in the near term. These concerns could be mitigated by providing for earlier and more regular price reviews over the life of the NBN Co SAU (including in Module 1). Optus submits that CVC is the product component that has the most direct impact on the consumer experience. It further submits that NBN Cos commitment in the SAU to lower CVC pricing over time is ambiguous and should be replaced with a specific link between CVC price declines and actual throughput levels. It provides an example that the CVC price could be specified for different average traffic levels, such as 150kbps and 300kbps. The CCC submits that it would provide greater comfort to access seekers if there were provisions that allowed the ԭ to have a formal role in reviewing CVC pricing. Macquarie submits that current CVC pricing will result in access seekers making a trade-off between high end-user prices and inferior service quality and that the SAU should contain more specific commitments for the ԭ to review the CVC price on or before 1 July 2016. AAPT submits that, as exponential growth in data traffic continues, CVC charges will quickly make up an increasingly greater proportion of the costs of providing services to end-users. It submits that, to provide greater comfort to access seekers about future CVC pricing, the ԭ should have a formal role in reviewing CVC pricing over time. In its submission to the draft Notice to Vary, NBN Co did not provide any further views on the frequency of price reviews during Module 1. However, in its submission to the Consultation Paper on the Notice to Vary, NBN Co submitted that the ԭ should not review prices at all in Module 1 because it is not necessary or useful for addressing retail price shock during migration, and because it would be inconsistent with NBN Cos legitimate business interests for the same reasons that the ԭ should not have a role in relation to pricing of new products in Module 1. The decision as to how soon and how frequently a price review should be able to occur during Module 1 is a finely balanced one. On the one hand including an earlier price review mechanism in Module 1 could potentially introduce additional pricing uncertainty for NBN Co in a period in which it already faces a high degree of demand uncertainty. Further, during the rollout period, NBN Co may have incentives to price its services in such a way as to encourage end-users to increase their use of the NBN because it is likely to face a high degree of revenue sufficiency risk. On the other hand, the longer the period of time before initial prices are subject to review, the more pricing risk access seekers will face. As noted above, access seekers submit that this may adversely affect their NBN-based investment decisions. In particular, given the uncertainty about CVC demand growth, there may be merit in the ԭ having the option to review CVC prices earlier during Module 1. On balance of these considerations, the ԭ has decided to: Provide it and NBN Co with the opportunity to commence a price review (by issuing a notice) from 1 July 2014 onwards. Allow for the outcomes of such a review (that is, for changes to Maximum Regulated Prices accepted or determined in a Price Review Arrangement) to have effect from 1July 2016 onwards. Importantly, this does not mean that the ԭ must or will commence a review by issuing a notice to NBN Co in July 2014. Rather, it provides the ԭ with the opportunity to do so if it considers that there are Maximum Regulated Prices that should be reviewed. It also does not mean that Maximum Regulated Price must or will be changed on 1 July 2016; rather, it simply provides the opportunity for this to take place. In addition, the ԭ has decided to: Allow for more than one price review to take place, and for more than one Price Review Arrangement to have effect, during Module 1but no more than two. Allow for the Price Review Arrangement to have effect from one to five years, as accepted or determined by the ԭ. Only allow a subsequent Price Review Arrangement to come into effect after the expiry of a previous arrangement. Combined, this means that Maximum Regulated Prices can only be changed twice by means of a review during Module 1; and that the ԭ has discretion when making the first review arrangement to determine how soon after a subsequent review should be able to occur. For example, the ԭ may decide that it does not consider that another should take place until five years after the first review, in which case it would specify a term for the Price Review Arrangement of five years. Or, it may decide that a further review should take place three years after the first review, in which case it would set a term of three years for the Price Review Arrangement. The ԭ has provided itself with the option of making a Price Review Arrangement with a one or two year term because it has also (in response to NBN Cos submission) now adopted this approach in Module 2the ԭ considers the review process should be as consistent as possible across Modules 1 and 2. When a Price Review Arrangement is not in operation, either the fixed prices of Offers that were previously Reference Offers will apply (up until 30 June 2017), or the CPI-1.5percent price control will apply. Importantly, the ԭ recognises the potential for NBN Co to face positive incentives during Module 1. Whilst limiting the review to only being able to take place in the second half of Module 1 would have given NBN Co certainty that the prices set out in the SAU would apply for a substantial period of time, the ԭ does not consider that the potential for these positive incentives is sufficient for the SAU to preclude the ԭ requiring NBN Co to address demonstrable issues with its pricing. Having said this, if NBN Cos observed behaviour during Module 1 indicates the desired impact of these incentives, the ԭ expects that it would be unlikely to be necessary for it to commence a review process as early as 1 July 2014 or make a Price Review Arrangement as soon as 1 July 2016, or to undertake more than one review during Module 1. Further, whilst limiting the review to only being able to take place in the second half of Module 1 would have ensured that all parties have the benefit of experience and data before a review occurs, if the amount of experience with and data about NBN Cos pricing is insufficient at the time of a review, the ԭ expects that it would be unlikely to make a Price Review Arrangement. Price Review Criteria and matters the ԭ must take into account in assessing a Price Review Arrangement As noted, in the draft Notice to Vary, in order for the ԭ to accept or make a Price Review Arrangement, it has to be satisfied that: the Maximum Regulated Price of each Reviewed Offer for each Financial Year to which the Price Review Arrangement applies is reasonable, having regard to the matters specified in section 152AH of the CCA and any other matter the ԭ considers relevant; and there is no material difference between: the present value of the difference between the expected Revenue and the expected costs that would be inputs to the ABBRR, between the commencement of the Price Review Arrangement and the SAU Expiry Date, if the Price Review Arrangement were in operation, and the present value of the difference between the expected Revenue and the expected costs that would be inputs to the ABBRR, between the commencement of the Price Review Arrangement and the SAU Expiry Date, if the Price Review Arrangement were not in operation. Further, in making its decision about a Price Review Arrangement, it must take into account: the characteristics of the Reference Offers, Non-Reference Offers and Other Charges other than the Reviewed Offers (Other Offers); the costs associated with Other Offers; the Revenue associated with Other Offers; and demand for Other Offers. NBN Co expressed a number of concerns in its submission about the Price Review Criteria and the matters that the ԭ must take into account in making its decision. Each of these concerns are addressed below. Impact on medium term cash flows NBN Co states that the matters that the ԭ must take into account in making a Price Review Arrangement that were specified in the draft Notice to Vary, as well as the requirement that the ԭ must have regard to NBN Cos legitimate businesses interests under the reasonableness criteria in section 152AH, do not recognise the importance of medium term cash flow stability for NBN Cos ability to efficiently (and cost effectively) finance its ongoing operations. It goes on to state that, it is foreseeable that the risk of NBN Cos medium term cash flows being significantly lowered as a result of a price re-balancing may have a detrimental impact on NBN Cos future debt raising and that this would be contrary to NBNCos legitimate business interests and the LTIE. Clause 1G.3.8(a) of the draft Notice to Vary already requires that the ԭ must not accept or issue a Price Review Arrangement unless it is satisfied that it is reasonable, having regard to the matters specified in section 152AH of the CCA. This includes having regard to NBN Cos legitimate business interests and the long-term interests of end-users. The ԭ considers that it would be likely to take into account NBN Cos ability to raise debt within the context of these criteria. The ԭ has not adopted NBN Cos proposed drafting, because it has concerns about the potential difficulty for it to assess the likely impact of a Price Review Arrangement on NBN Cos ability to raise funds, including debt. In particular, it could lead to a forensic assessment of NBN Cos financing practices which might not be appropriate. Further, the ԭ considers NBN Cos proposed drafting is overly prescriptive given the 27 year term that the objective would be locked in for. Nonetheless, the ԭ has made a change to the draft Notice to Vary to address NBN Cos concern. The Notice to Vary now specifies that, in making its decision on a Price Review Arrangement, the ԭ will take into account the legitimate business interests of NBN Co. This will allow NBN Co, at the time of the price review, to make arguments as to how a particular Price Review Arrangement would affect its ability its legitimate business interests, including its ability to raise and service funds (whether this be in the short, medium or long term) and for the ԭ to consider those arguments at that time. The ԭ has also made some minor changes to clarify that it is the impact of the ԭs decision on demand and revenues for and from other Offers that will be taken into account in making its decision, rather than just existing demand and revenues for and from those other Offers. Defining material difference NBN Co states the following: It is concerned that the term material difference could be open to a wide range of possible interpretations. A Price Review Arrangement sets a Maximum Regulated Price or Maximum Regulated Prices that flow through to forecast net revenue via assumptions about the relationship between prices and demand for all NBN offers and chargesMaximum Regulated Prices could thus be set so as to achieve exact net revenue neutrality on a forecast basis. A concept of materiality is therefore not needed at all. However, such Maximum Regulated Prices may need to be specified to an unworkably large number of decimal places. It is therefore more practical to include a well-defined materiality concept that would allow some flexibility to set Maximum Regulated Prices to a commercially relevant number of decimal places. The well-defined materiality concept that NBN Co proposes is that a material difference be defined as an amount plus or minus $1 million at the SAU commencement date, and then indexed to the CPI over time. NBN Co argues that this definition represents an amount that would provide sufficient flexibility on the first occasion that a Price Review Arrangement could come into effect and provides flexibility later in the SAU term, as the number of forecast years of Net Revenue between the date of the PRA and the end of the SAU term diminish. The implications of NBN Cos proposal are that, in order for the ԭ to be able to accept or make a Price Review Arrangement which changes Maximum Regulated Prices, that change must have a less than $1 million impact on NBN Cos expected net revenues over the remaining term of the SAU. The ԭ appreciates that NBN Co wishes to have greater certainty over the extent to which a re-balancing of Maximum Regulated Prices will be able to impact upon its expected net revenues. However, whilst NBN Co states that the $1 million figure provides sufficient flexibility, it has not provided information or modelling to demonstrate why this is the case. The ԭ therefore cannot be satisfied that the proposed approach will not lead to unintended consequences in terms of unduly constraining its ability to re-balance Maximum Regulated Prices over the term of the SAU. This uncertainty is exacerbated by the fact that the definition would be locked in for the 27 year term of the SAU. Were the definition to lead to unintended consequences, it would not be open to the ԭ or other parties to seek to amend the definition. Given the untested nature of this aspect of the Price Review Criteria, the ԭ wishes to be able to garner the benefit of experience in assessing and making Price Review Arrangements prior to locking in definitions such as those proposed by NBN Co. It will be open at the time that NBN Co lodges its first Price Review Arrangement proposal to expand upon its arguments about why only a $1 million difference in expected net revenues is an appropriate benchmark to adopt in determining whether a Price Review Arrangement should or should not be accepted or made. Costs to be netted off revenues in determining whether there is a material difference in net revenues The ԭ accepts NBN Cos argument that the meaning of the term the expected costs that would be inputs to the ABBRR generates ambiguity. The ambiguity is that it is not clear whether it is intended that: the sum of expected Capital Expenditure over the remaining term of the SAU; or the sum of the expected return of and return on that Capital Expenditure over the remaining term of the SAU, be included in the calculation of the difference between revenues and costs. The ԭ has not adopted NBN Cos proposed approach to addressing this ambiguity, whereby it would be the sum of expected Capital Expenditure over the remaining term of the SAU that would be taken into account. The ԭ notes that NBN Co has not provided any arguments in support of why this particular approach should be adopted. NBN Cos proposed drafting would mean that (at the time of the review) the ԭ would subtract from total expected revenues the total sum of expected capital expenditure over the remaining term of the SAU. The ԭ would then compare the resulting net revenues in the scenario where the Price Review Arrangement is in operation to those in the scenario where the Price Review Arrangement is not in operation. If the change in Maximum Regulated Prices does not result in a change in demand which subsequently affects capital expenditure, it is in effect simply the difference between the expected revenues earned over the remaining term of the SAU under each scenario that needs to be compared. On the other hand, it is possible that a change in Maximum Regulated Prices could generate an increase in demand which leads to an increase in capital expenditure over the remaining term of the SAU (for example, due to a need to upgrade capacity). Under NBN Cos proposed drafting, the total value of that additional capital expenditure would be subtracted from the revenues that are expected to be earned over the remaining term of the SAU. In effect, there could therefore only be no material difference between the net revenues earned with and without the Price Review Arrangement if expected revenues increased such that they allowed NBN Co to recover the total value of the additional capital expenditure during the remainder of the SAU term. This is despite the fact that a reasonable depreciation profile may suggest that part of the additional capital expenditure should be recovered after the expiry of the SAU. That is, as is generally the case for any entity regulated under a Building Block Model, NBN Co should not be entitled to recover the full value of an amount of capital expenditure within the year it is incurred, or a period that is less than the life of the relevant asset to which the capital expenditure relates. Rather, the recovery of that capital expenditure should be spread over time (typically over the life of the relevant assets in question), in accordance with an established depreciation profile. Capital expenditure that is not recovered in the regulatory period remains in the RAB, to be recovered in future regulatory periods. The implications of only being able to make a Price Review Arrangement which changes Maximum Regulated Prices in such a way that the total value of the additional capital expenditure is recovered during the remainder of the SAU term are as follows: Firstly, it would lead to inconsistency between revenues generated by prices under a Price Review Arrangement made in this way and the amount of revenue that NBN Co is entitled to recover when the building block revenue period is in operation. Under the Price Review Arrangement, NBN Co would be able to recover all additional capital expenditure in the SAU period resulting from the rebalanced prices (in cases where the rebalanced prices result in an increase in capital expenditure). In contrast, NBN Co would only be able to recover the portion of additional capital expenditure that is depreciated during the SAU period when the building block revenue period is in operation, with any undepreciated amounts to be recoverable beyond the SAU period. Secondly, Maximum Regulated Prices would be higher than they would have been had only the part of the capital expenditure that is depreciated before the end of the SAU been included in the netting off calculations. In turn, the current relationship that is established by the CPI-1.5 per cent price control between expected revenues and expected annualised costs over the term of the SAU would change. A key reason for the ԭ proposing that any price review be revenue neutral is thatdoing so should maintain the positive incentives created by the CPI-1.5percent price control for NBN Co to invest and operate efficiently. The incentives to behave efficiently with respect to investment and operations derive from the prospect that NBNCo may not be able to recover its expected annualised costs over the term of the SAUincentives are in turn created for it to operate and invest in such a way that only efficient costs are incurred. To the extent that the prospect of NBN Co being able to recover its expected annualised costs over the term of the SAU is enhanced by virtue of an increase in Maximum Regulated Prices reflecting more than the increase in those costs, these incentives may be dulled. For these reasons, in assessing what change in Maximum Regulated Prices would satisfy the requirement that the change does not lead to a material difference in net revenues, the ԭ considers that the resulting change in revenues allows NBN Co to recover the proportion of the additional capital expenditure that it is entitled to earn a return of and on for the remaining term of the SAU (as opposed to the total value of the capital expenditure). The proportion of the additional capital expenditure that NBN Co has not yet recovered at the expiry of the SAU term would remain in the RAB for future recovery. To implement this approach, the ԭ has adopted the following drafting. In order to accept a Price Review Arrangement, the ԭ must be satisfied that there is no material difference between: the present value of the difference between the expected Revenue and the sum of expected ABBRR for each Financial Year, between the commencement of the Price Review Arrangement and the SAU Expiry Date, if the Price Review Arrangement were in operation; and the present value of the difference between the expected Revenue and the sum of expected ABBRR for each Financial Year, between the commencement of the Price Review Arrangement and the SAU Expiry Date, if the Price Review Arrangement were not in operation.  Importantly, the same assumptions must be made about asset lives, the same depreciation method must be used and the same rate of return must be applied (for the purposes of both estimating the return on capital and for establishing present values) in undertaking this comparison across the two scenarios. Constraints in relation to Uniform National Wholesale Pricing and the legislative hierarchy in Part XIC NBN Co submits that: the ԭs decision making in regard to price review arrangements should be subject to the same conditions in regard to uniform national pricing as apply to ԭ decisions on Access Determinations and SAUs; and the SAU should specify that price review arrangements have no effect to the extent of any inconsistency with the SAU. The ԭ accepts NBN Cos first submission and has included drafting to address this issue in the Notice to Vary. However, regarding the second submission, the ԭ considers that it could not make a decision under a power conferred by the SAU that was inconsistent with another part of the SAU regardless of whether or not NBN Cos proposed drafting is adopted (not least because to do so would lead to an internally inconsistent regulatory arrangement this would create ambiguity and a lack of regulatory certainty). The ԭ has therefore not included NBN Cos proposed drafting in the Notice to Vary. Changes to Maximum Regulated Prices in response to tax change events As noted in the Response to Submissions, there are certain changes to taxes that qualify as tax change events that the ԭ considers should be able to be passed through into Maximum Regulated Prices. As Maximum Regulated Prices are established by the SAU, the SAU must therefore provide for Maximum Regulated Prices to change as a result of these tax change events. The draft Notice to Vary therefore proposed a process which would allow these changes to take place. It is intended that the proposed process for changing Maximum Regulated Prices in response to tax change events would operate as follows. Under the draft Notice to Vary, during Module 1, NBN Co and access seekers would in the first instance negotiate and agree upon the changes to Maximum Regulated Prices that occur as a result of tax change events. To give effect to this, according to clause 1G.2.2(a), NBN Co has 60business days to identify that a tax change event has occurred and to publish a statement on its website that sets out proposed changes to Maximum Regulated Prices. If no access seeker objects to the changes to the Maximum Regulated Prices within a relatively short period of time, these changes take effect. If any access seeker objects, the changes do not take effect. NBN Co may include multiple tax change events in a single proposal and propose changes to the maximum regulated prices to reflect the collective effect of those tax change events. However, the ԭ also recognises that, in the case of increases to Maximum Regulated Prices as a result of an increase in taxes, NBN Co may have incentives to seek to increase Maximum Regulated Prices by more than should be permittedthat is, by more than is required to recover the increased costs associated with the increase in taxes. Further, in the case where there is a decrease in taxes, NBN Co may seek to decrease Maximum Regulated Prices by less than is reflective of the decrease in in costs associated with the tax reduction, or to delay or avoid any decrease in Maximum Regulated Prices at all. Consequently, while the SAU provides for Maximum Regulated Prices to change as a result of tax change events through agreement between NBN Co and access seekers, the ԭ considers that it is necessary for the SAU to also provide for the ԭ to determine this if it cannot be agreed. In order to address a situation where NBN Co may not have incentives to decrease Maximum Regulated Prices in response to a negative tax change event, under clause 1G.2.5 the ԭ may issue a notice to NBN Co in relation to a negative tax change event if: NBN Co and access seekers cannot agree on the decrease in prices and NBN Co does not apply to the ԭ in relation to the event; or if NBN Co does not publish a statement about a negative tax change event within the 60 business days of the tax change event occurring. This is aimed at creating incentives for NBN Co to negotiate with access seekers in relation to negative tax change events by enlivening a power for the ԭ to determine changes to Maximum Regulated Prices if NBN Co does not do so. If an access seeker objects to NBN Cos proposed changes to Maximum Regulated Prices (and these changes therefore do not take effect) NBN Co may apply to the ԭ to change Maximum Regulated Prices in relation to a tax change event or tax change events, and the ԭ may determine the change to Maximum Regulated Prices (which may or may not be the same as that proposed by NBNCo). The ԭ may also determine the change to Maximum Regulated Prices if it has issued a negative tax change events proposal. The purpose of these notifications is, firstly, for the ԭ to determine a total change in NBN Cos costs (how much) and, secondly, to determine changes in Maximum Regulated Prices that are reasonable and will change NBN Cos revenues to reflect the change in costs (how achieved). The change to Maximum Regulated Prices must be reasonable, taking into account a number of matters. The ԭ considers it should have discretion to refuse to change Maximum Regulated Prices (that is, make a decision of no change) if the change in NBN Cos costs is not material, or to consider a tax change in context (for example, that there have been a number of small tax changes, or offsetting tax changes, etc.). During Module 2, the ԭ considers that there may be a need to revisit how tax change events are treated. Consequently, the ԭ has proposed that the replacement module process is utilised to do this. That is, the specific manner in which Maximum Regulated Prices may be changed in response to a tax change event is to be determined through the replacement module process. The draft Notice to Vary therefore recognised in the price controls in Module 2 that these are subject to this aspect of a replacement module. It is intended that there is scope to address how changes in taxes are treated for the purposes of both the revenue constraints (ABBRR/ICRA) and price controls (Maximum Regulated Prices) through replacement modules, including the kinds of taxes and changes to these taxes that would constitute a tax change event during Module 2, as well as processes for changing relevant values. Only limited submissions were received to the draft Notice to Vary in relation to the proposed approach to addressing tax change events. NBN Co submitted that: The timeframe within which NBN Co must publish a statement in relation to a tax change event in Module 1 should be changed from 60 business days to 12 months. This is because it may take an extended period of time to determine the effects of some tax change events. In the definition of relevant tax, the word means should be changed to includes. This would have the effect of defining the taxes that may be passed through to customers in a non-exhaustive way. As a result, any other taxes not listed in the relevant tax definition could be passed through to customers either by commercial agreement between NBN Co and access seekers, or as determined by the ԭ. The ԭ accepts that there may be circumstances in which 60 days may be too short a timeframe to consider the effects of a particular tax change event. However, the ԭ considers that addressing this problem by increasing the timeframe for notification of a change to Maximum Regulated Prices to 12 months could allow NBN Co to delay proposing changes to Maximum Regulated Prices in response to negative tax change events, whilst not doing so in response to positive tax change events. This could allow NBN Co to keep the gains from Maximum Regulated Prices not reflecting a decrease in costs for a longer period of time that it wears any increase in costs resulting from positive tax change events. As noted in the Response to Submissions, the ԭ considers that it is important for there to be symmetry in how positive and negative tax change events are treated, in order to maintain the positive incentive properties of the CPI-1.5percent price control. To address NBN Cos concern that 60 business days may be too short a timeframe to consider the effects of a particular tax change event, in the Notice to Vary, the ԭ has included clauses which allow NBNCo to apply to the ԭ to extend the timeframe for publishing a statement, and for the ԭ to approve or reject this extension application. The ԭ has not adopted NBN Cos suggested change to the definition of Relevant Tax, because the ԭ intends for the types of events listed in the definition to be an exhaustive list. The last two limbs of the definition of Relevant Tax proposed by NBN Co in the 18 December SAU referred to changes to taxes imposed on third parties. Changes to taxes imposed on third parties do not normally constitute tax changes for regulatory purposes, and the ԭ therefore removed these two limbs from the definitions in the Notice to Vary. The ԭ does not accept NBN Cos submission that the definition of Relevant Tax should be defined in a non- exhaustive way in order to allow the pass-through of such taxes to access seekers by agreement or Regulatory Determination. However, the ԭ notes that the exhaustive nature of the drafting does not prevent NBN Co and access seekers from commercially agreeing to such a pass-through in an Access Agreement, which would override the SAU to the extent of any inconsistency under the legislative hierarchy. The ԭ has also clarified the circumstances in which the ԭ may notify NBN Co of the occurrence of a negative tax change event and proceed to make a determination on whether and how Maximum Regulated Prices may be changed in response to the negative tax change event. The drafting changes makes it clear that the ԭ may notify the tax change event if NBN Co does not issue a tax change events proposal in response to a negative tax change. The ԭ may also notify the tax change event where NBN Co has issued a tax change event proposal in relation to a negative tax change event and an access seeker has objected to the proposal, but NBN Co has not requested that the ԭ make a determination on the negative tax change event. Long-term revenue constraint The variations that are discussed in this section relate to the issues discussed in section 5.5 of the Draft Decision, section 2.4.2 of the Consultation Paper, section 2.4.2 of the Response to Submissions and Schedules 1D, 1E, 1F and 2C of the Notice to Vary. The key variations that the ԭ proposed to the long-term revenue constraint methodology in the draft Notice to Vary were as follows: In Module 1, the RAB, ICRA and annual revenue requirements would continue to be determined on an ex-post basis by applying the methodologies set out in the SAU. However, the draft Notice to Vary proposed that the ԭ would determine these values, rather than NBN Co, including the values of capital and operating expenditure. The draft Notice to Vary also included variations to the methodologies for calculating capital and operating expenditure, the tax allowance and the annual construction-in-progress allowance. In Module 2, the annual revenue requirements would continue to be determined based on forecasts approved by the ԭ. However, the draft Notice to Vary proposed that most of the detailed methodologies for calculating the forecasts of the individual components should be removed. The draft Notice to Vary also proposed that the process for rolling forward the RAB should be determined for each regulatory cycle as part of the replacement module process, rather than being locked in based on actual costs for the term of the SAU. The long-term revenue constraint methodology would be amended so that all cash flows would be recognised on a consistent end-of-year basis for the duration of the SAU term. This change would be implemented through the removal of the half-WACC adjustment to capital expenditure when it is rolled into the RAB, and equivalent changes to the annual construction in progress allowance. The ԭ also sought views on whether variations were required to address issues arising in relation to the mechanics of the ԭs assessment of the long-term revenue constraint methodology (LTRCM) and issues in the transition from Module 1 to Module 2 and between regulatory cycles in the building block revenue period. The following matters were raised in submissions in response to the draft Notice to Vary: Access seekers generally supported the approach adopted by the ԭ in the draft Notice to Vary. Access seekers supported the ԭs intention to further clarify in the SAU when the price controls binds and when the long-term revenue constraint binds. Optus indicated its preference for greater discretion for the ԭ in relation to the long-term revenue constraint. NBN Co proposed further amendments on the following matters: Timing of cash flows NBN Co has proposed that the long-term revenue constraint methodology recognise cash flows on a mid-year basis; Criteria for allowing capital expenditure to be rolled into the RAB in Module 1; RAB roll-forward arrangements in Module 2; and The basis for calculating the ICRA in Module 2. The rest of this section sets out the ԭs considerations of these submissions, and explains the variations adopted in the Notice to Vary: Section  REF _Ref360541751 \r \h 6.1 sets out some overarching issues with the long-term revenue constraint methodology (in particular, the mechanics of the ԭs assessment of LTRCM components and the assumptions made with respect to the timing of cash-flows). Section  REF _Ref360035689 \r \h 6.2 sets out the variations to the long-term revenue constraint methodology in Module 1. Section  REF _Ref368932875 \r \h 6.3 sets out the variations to the long-term revenue constraint methodology in Module 2. Overarching issues with the long-term revenue constraint methodology This section sets out the variations that the ԭ is proposing in relation to the overarching issues with the long-term revenue constraint methodology, in particular: the mechanics of ԭ assessment of LTRCM components and transitional issues; cash flow timing assumptions; and long-term revenue constraint definitions. Mechanics of ԭ assessment of LTRCM components and transitional issues In the Response to Submissions, the ԭ indicated that it had identified some practical issues regarding the mechanics of the ԭs assessment of the LTRCM and transitional issues between Module 1 and Module 2 and between regulatory cycles in the building block revenue period in Module 2. Regarding the transition from Module 1 to Module 2, the ԭ noted that the opening RAB and opening ICRA balance in Module 2 would not be finalised until after the ԭ had completed its LTRCM assessment for the final year of Module 1, which would only be completed in the first year of Module 2. As the ԭ determines forecast nominal ABBRRs on an ex-ante basis in Module 2, the ԭ noted that explicit provisions that allow for the estimation of the RAB and ICRA would be required. It also indicated that it would give further consideration to how any differences between estimated and actual values for these items would be treated. Regarding the transition between regulatory cycles in the building block revenue period in Module 2, the amount of revenue NBN Co will be able to recover over a regulatory cycle would be based on forecast nominal ABBRR (which will be determined by the ԭ before the start of the regulatory cycle through the replacement module process) and an amount carried forward from either Module 1 or the previous regulatory cycle. This amount will not be known until after the regulatory cycle begins. The ԭ indicated that it would consider whether a provision that allows for the ԭ to estimate the amount carried forward as part of the replacement module process would be required, and if so, whether any explicit mechanism is required to address any deviation between the estimated and the actual values of these amounts. In its submission to the draft Notice to Vary, NBN Co made the following points: The RAB and the ICRA should be treated as regulatory accounting concepts, and based on actual values (or, where relevant, ԭ determined values based on actual values), and that there is no apparent benefit from, and some risk involved in, using estimates instead of actuals in this context. There is already provision in the draft Notice to Vary for forecasting the RAB for the purpose of calculating the Forecast Nominal ABBRR in Module 2, and NBN Co proposes an amendment so that the relevant clause also covers forecasting the opening value of the RAB in the first Financial Year in a Regulatory Cycle. In regard to the ICRA, there is no calculation in the SAU that explicitly includes reference to a forecast value of the ICRA. NBN Co will be implicitly required to forecast the ICRA in regard to likely methodology change event notices, but that forecast will be based on the actual value of the ICRA up to whatever is the current point in time. In regard to the building block revenue period in Module 2, the SAU provides for the automatic carry forward of amounts and there is no need for estimates of any carried forward amounts to be made as part of a Replacement Module. The SAU is deliberately silent in regard to whose role it is to calculate the relevant amounts of such carry forward or what reporting will be provided to the ԭ in regard to compliance with these aspects of the LTRCM. This leaves open the possibility of (and the flexibility for) the ԭ using its RKR and other powers under the CCA to address these matters as appropriate over time. No other submissions commented on the mechanics and transitional issues identified in the Response to Submissions. The ԭ has considered these matters further and proposes further amendments in the Notice to Vary in relation to the RAB and ICRA in Module 2 and the operation of the building block revenue period in Module 2. These are discussed in the following sections. RAB and ICRA in Module 2 The ԭ has given further consideration to the need to estimate an opening RAB value at the start of Module 2 and each regulatory cycle, as well as the arguments made by NBN Co in its submission to the draft Notice to Vary. The ԭ considers that it is necessary to estimate the RAB, to the extent that the relevant actual information or values are not known at the time of the replacement module assessment process, for the purposes of calculating the return on assets component of the forecast nominal ABBRR for each year of the regulatory cycle. A value for the opening RAB in each year of an upcoming regulatory cycle is needed for this calculation. However, as noted above, given that the forecast nominal ABBRR is determined before the start of each regulatory cycle, the actual values of capital expenditure and disposals for the final year (or years) of the current regulatory cycle which are necessary inputs into this calculation will not yet be known. In the Notice to Vary, the ԭ has adopted NBN Cos proposal to expand the provisions regarding the calculation of the forecast RAB to clarify that an estimate of the RAB at the start of a regulatory cycle may be made to the extent that actual values of the inputs are unavailable. The ԭ has made minor drafting amendments to those provided by NBN Co in its submission to provide further clarity regarding how the estimate is to be made. Further, the ԭ has given consideration to how any differences between estimated and actual values of the RAB should be treated once they are known. The ԭ has considered this issue because the return on assets component of the forecast nominal ABBRR in each year of a regulatory cycle would be based on a forecast value of the RAB. This forecast RAB would depend on the opening value of the RAB for the regulatory cycle which, as mentioned above, would be estimated to the extent that the required information is not available. If the estimated opening RAB for the regulatory cycle is greater than the value of the opening RAB which is rolled forward at the end of that regulatory cycle, then NBN Co would receive a greater return on assets than what would be allowed by the actual value of the RAB. Conversely, if the estimated opening RAB for the regulatory cycle is less than the value of the opening RAB which is rolled forward at the end of that regulatory cycle, then NBN Co would receive a lower return on assets than what would be allowed by the actual value of the RAB. NBN Co has not expressed a view in its submission on how differences between estimated and actual RAB values should be treated. The ԭ considers that a mechanism is required to account for any such differences. This is to ensure that NBN Co would earn an appropriate return on its assets, and that any effect associated with deviations between actual and estimated values would be removed. The new clause 2C.7.7(a)(ii)(B) achieves this. Finally, the ԭ has considered the need for provisions that allow for the estimation of the ICRA. The ԭ agrees with NBN Cos argument that because the ICRA is not used in the calculation of any other elements of the long-term revenue constraint methodology, there is no need to estimate it. Further, the ԭ recognises that NBN Co will need to estimate the ICRA in anticipation of a methodology change event. Therefore, the ԭ considers that a provision for this purpose is not required. Building Block Revenue Period in Module 2 The ԭ has given further consideration to the operation of the building block revenue period in Module 2. Clause 2D.5 of the 18 December 2012 SAU provides for the following: over a regulatory cycle, NBN Co will be entitled to recover the sum of the total forecast nominal ABBRR over that regulatory cycle; for the purpose of determining the amount of revenue NBN Co is entitled to recover over a regulatory cycle, forecast nominal ABBRR and revenues are evaluated in present value terms and adjusted for changes in CPI; any relevant tax effects, including those related to tax change events will be taken into account; and any amount carried forward from Module 1 or the previous regulatory cycle (either as a revenue variation during the building block revenue period or as a carry forward revenue adjustment if the ICRA period ends in the final year of Module 1 or the previous regulatory cycle), is to be added or subtracted from the amount of revenue that NBN Co is entitled to recover. During Module 2, the forecast nominal ABBRR for each year of a regulatory cycle will be approved or determined by the ԭ before the regulatory cycle starts through the replacement module process. However, there is no explicit role for the ԭ in relation to other parts of the process for determining the amount of revenue NBN Co is entitled to recover over a regulatory cycle. That is, the ԭ has no explicit role in approving or determining how adjustments for the time value of money and CPI are made, or the amount to be carried forward (as either a revenue variation or carry-forward revenue adjustment) from Module 1 or between regulatory cycles. The ԭ considers that flexibility in the operation of the building block revenue period in Module 2, which is provided for by the principles in clause 2D.5 of the 18 December 2012 SAU, is appropriate. However, the ԭ is concerned that the flexibility of these provisions, and the absence of an explicit ԭ role in determining or approving amounts calculated under these provisions, could lead to disagreements between NBN Co, the ԭ and other parties in relation to the amounts of revenue to be carried forward between regulatory cycles. As amounts carried forward from previous regulatory cycles will determine the amount of revenue that NBN Co is entitled to recover over a regulatory cycle, the ԭ considers that the SAU should include an explicit role for it in approving or determining these amounts. The ԭ notes NBN Cos comments that the SAU is deliberately silent on whose role it is to calculate the relevant amounts carried forward from previous regulatory cycles or from Module 1. Although these matters may be able to be addressed in Module 2 through the making of an Access Determination or a Binding Rule of Conduct, it is unclear how these instruments could be used to resolve disagreements about the amount carried forward between regulatory cycles, and how they would interact with the SAU. The ԭ therefore considers that an explicit mechanism should be included in the SAU to address this issue. The ԭ has therefore included provisions in the Notice to Vary that provide for NBN Co to propose an estimate of the amount to be carried forward from either Module 1 or the previous regulatory cycle as part of a replacement module application, and for this amount to be assessed by the ԭ. The estimate of the amount carried forward would then be reflected as adjustments to the forecast nominal ABBRRs for the relevant regulatory cycle. Under this approach, both elements of the revenue that NBN Co will be entitled to recover over a regulatory cycle (forecast nominal ABBRRs and the amount carried forward) will be assessed as part of the replacement module process and will ensure that any amounts carried forward are subject to explicit ԭ review. The ԭ considers that this approach will provide sufficient oversight of the operation of the building block revenue period in Module 2 and is more consistent with the overall structure of the SAU compared to other potential options (such as an annual tariff or revenue approval process). Cash flow timing assumptions In section 2.4.2.1 of the Response to Submissions, the ԭ stated it is not satisfied that assuming that capital expenditure is incurred in the middle of the year (on average) while assuming that operating expenditure and revenues occur at the end of the year will lead to NBN Co being compensated for only its efficient costs (including a normal commercial return). The ԭ proposed in the draft Notice to Vary that, in both Module 1 and Module 2, it be assumed that all of these cash flows occur at the end of the year, and therefore that the half-WACC adjustment to capital expenditure be removed from the SAU. This is because: whereas in the context of energy and Telstras fixed-line services, cash flow timing assumptions can be reviewed periodically by the AER and ԭ, accepting the SAU in its current form would lock in inconsistent cash flow timing assumptions for the full SAU term; NBN Co has not provided any economic justification in support of why the inconsistency in its cash flow timing assumptions is reasonable; and the ԭ does not consider that there is appropriate provision to accommodate for consistent cash flow timing assumptions in Module 2, as argued by NBN Co, and in any case the ԭ considers that cash flow timing assumptions should be consistent between Module 1 and Module 2. Whilst the ԭ stated in its Response to Submissions that it would consider it reasonable to consistently assume that cash flows occur in the middle of the year on average, the ԭ proposed, because of the complexity involved in implementing this approach, that end-of-year assumptions be made. In its submission to the draft Notice to Vary, NBN Co proposes that: cash flows be consistently assumed to occur mid-year in Module 1, as this assumption would be more realistic than an end-of-year assumption; and in Module 2, cash flow timing assumptions to apply for a particular Regulatory Cycle should be addressed as part of the relevant Replacement Module Application. Further, NBN Co submits that its mid-year approach for Module 1 is consistent with an Allen Consulting Group report to the ԭ in 2002 on the subject of working capital. In this report, a methodology for recognising mid-year cash flows is derived. NBN Co has provided drafting in its submission that gives effect to these proposals. Optus submits that it supports the ԭs proposed variations to the LTRCM in the draft Notice to Vary, including the removal of the half-WACC adjustment. No other submissions provided views on this issue. The ԭ has considered NBN Cos submission and analysed NBN Cos proposed mid-year approach. However, the ԭ is not satisfied that NBN Cos proposed amendments represent an appropriate method for recognising mid-year cash flows, nor does it consider that it is reasonable to depart from the proposal in the draft Notice to Vary to treat cash flows in a consistent end-of-year manner. This is for the following reasons: Firstly, NBN Cos mid-year proposal treats operating expenditure as a capital cost by applying a half-WACC adjustment to the full value of operating expenditure in any given year, when operating expenditure should be capitalised only to the extent that it is unrecovered (and only during the initial cost recovery period). This is already done with the initial cost recovery account. Secondly, the proposal does not account for the mid-year timing of capital-related revenue, and instead assumes that it is received at the end of the year. As a result of the capitalised operating expenditure building block and end-of-year assumption with regard to capital-related revenue, on an intra-year basis, NBN Cos mid-year model would generate excess returns via a greater return on cash flow timing than in the Allen Consulting Group model. Thirdly, the variable approach to cash flow timing in Module 2 in NBN Cos proposal raises the possibility of such outcomes as artificially inflating the amount of capitalised unrecovered cost that NBN Co is entitled to recover. These reasons are discussed in more detail in the sections below. Treatment of operating expenditure as capital NBN Cos proposed amendment to the ABBRR formula applies a half-WACC adjustment to operating expenditure, thereby increasing NBN Cos revenue requirement in any given year. The ԭ considers that this is inappropriate. In other regulatory models, such as the AERs Post Tax Revenue Model and the ԭs Fixed Line Services Model, revenues and operating expenditure are assumed to be approximately synchronised, and as a result there is no adjustment made to operating expenditure in building block calculations. This assumption is also reflected in the mid-year approach specified in the Allen Consulting Group report cited by NBN Co in its submission. In the current context, the ԭ considers that it is reasonable to make the same assumption about the relative timing of NBN Cos operating expenditure and revenues and this is an assumption that is reflected in the 18 December 2012 SAU. Therefore, the ԭ considers that the operating expenditure building block should not be increased by a half-WACC. The ԭ acknowledges that during such time as NBN Cos revenues are insufficient to recover its operating expenses, this shortfall should be capitalised. NBN Cos proposed ABBRR applies a half-WACC adjustment to the full value of operating expenditure in any given year. However, the ԭ considers that operating expenditure should only be capitalised to the extent that it is unrecovered in a particular year so as to be recovered in a later year and in any case this is achieved through the initial cost recovery account. Therefore, the ԭ considers that an adjustment to the operating expenditure component of the revenue requirement should not be made for this purpose, in either the initial cost recovery period or the building block revenue period. Non-recognition of mid-year timing of capital-related revenue NBN Cos proposed amendments do not account for an approximated mid-year timing of cash inflows relating to the return on and of capital. Given that the capital-related components of NBN Cos revenues would be assumed to be received evenly throughout the year, and given that there is no mid-year adjustment made to these building blocks in NBN Cos proposed mid-year ABBRR, NBN Co would earn a return on the timing difference between when it actually receives capital-related revenue (throughout the year) and when the LTRCM assumes it receives capital-related revenue (at the end of the year). Therefore, the ԭ considers that an appropriately specified revenue requirement recognising mid-year cash flows should discount the return on and of capital building blocks by a half-WACC. This is also reflected in the mid-year approach specified in the Allen Consulting Group report cited by NBN Co. Potential for excess returns under NBN Cos mid-year proposal Despite treating operating expenditure as capital and not recognising the mid-year timing of capital related revenue, NBN Co argues in its submission, as noted above, that its proposed mid-year model is consistent with the mid-year approach specified in the Allen Consulting Group report. This consistency is intended to be achieved through the adjustment of the unrecovered cost formula. However, the ԭs analysis has indicated that this adjustment will result in excess returns accruing to NBN Co throughout the SAU term. Throughout any given year (that is, on an intra-year basis), the revenue requirement under NBN Cos mid-year approach would be greater than the revenue requirement calculated under the Allen Consulting Group approach. This is because, firstly, operating expenditure is increased by a half-WACC, and secondly, the mid-year timing of capital-related revenue is not recognised. While the Allen model is a mid-year model on an intra-year basis (with capital-related revenue discounted by a half-WACC), NBN Cos mid-year proposal is an end-of-year model on an intra-year basis, allowing a full years return on cash flow timing. In the years when NBN Co earns revenue in excess of the ABBRR in order to reduce the size of the ICRA, NBN Co will realise this extra return on cash flow timing in two forms: firstly, by recovering larger than efficient unrecovered costs accrued in the loss-accumulation phase, and secondly, the higher return on cash flow timing in the current year. Since these excess returns are not accounted for by NBN Cos mid-year approach, the model results in a net present value of zero. However, if the excess returns were appropriately recognised as cash inflows, it would produce a positive net present value result. Potential consequences of different cash flow timing assumptions between modules NBN Cos proposal for cash flow timing assumptions to be unspecified in Module 2 raises the possibility of inconsistent assumptions being made between Module 1 and Module 2. The ԭ considers that this approach may result in unintended consequences in the future. If, for example, NBN Cos mid-year approach were adopted for Module 1, this would result in a certain level of the ICRA being reached through the capitalisation of previously unrecovered cost (calculated each year in accordance with NBN Cos proposed mid-year unrecovered cost formula). If these mid-year assumptions were not maintained, and there were a switch to end-of-year cash flow timing assumptions in Module 2, then from the start of Module 2 onwards unrecovered cost would be higher in each year than it would have been if mid-year assumptions had been maintained. Subsequent capitalisation of these higher unrecovered costs would then result in a higher level of the ICRA. Put simply, switching to end-of-year assumptions in Module 2 could potentially lead to a significantly larger amount of capitalised unrecovered cost that NBN Co would be entitled to recover. Therefore, in order to avoid this possibility, as well as any other unintended consequences of switching between different cash flow timing assumptions throughout Module 2, the ԭ considers that cash flow timing assumptions should be consistent throughout the SAU term regardless of whether a mid-year or an end-of-year approach is adopted. The ԭ acknowledges that issues relating to cash flow timing could arise over the course of Module 2 that may need to be addressed. For example, it may come to be that at some point during the SAU term, the timing of NBN Cos revenues and operating expenditure is no longer aligned. However, due to the possibility of such outcomes as artificially inflating the level of the ICRA during Module 2, as mentioned above, the ԭ considers that there should be no changes to the fundamental assumptions of cash flow timing throughout the SAU term. Rather, the ԭ considers that cash flow timing assumptions should be maintained throughout the SAU term and that any issues arising from changes in NBN Cos actual cash flow timing can be addressed by other means, for example by including an adjustment to the forecast revenue requirement in a replacement module application. Variations to LTRCM definitions The Notice to Vary includes variations to a number of LTRCM definitions. These variations are included both in response to NBN Cos submissions and the ԭs further consideration of these matters. The key variations, and the reasons for including them, are as follows. Related Body Corporate of NBN Co In the 18 December 2012 SAU, the definitions of Operating Expenditure and Relevant Assets (as well as a number of assets and equipment) include related body corporate of NBN Co. However, the definition of Revenue refers only to revenue earned by NBN Co, and the definition of Capital Expenditure does not specify whom it is incurred by. This creates some uncertainty about whether the sources of revenue in the SAU will under or over-compensate NBN Co for the sources of its expenditure. The Notice to Vary clarifies that the definition of Revenue includes revenue received by a related body corporate of NBN Co, and the definition of Capital Expenditure includes capital expenditure incurred by a related body corporate of NBN Co. The definitions of a number of asset and equipment related matters have also been similarly amended. These changes to Revenue and Capital Expenditure in the Notice to Vary are proposed to provide consistency between the sources of revenue and expenditure under the SAU. This will ensure that NBN Co is not under or over-compensated in the SAU. Capital Expenditure and Third Party Funded Network Changes The 18 December 2012 SAU includes a number of mechanisms to address assets funded by third parties. For example, clause 1E.2.1(b) of Schedule 1E precludes NBN Co from including in the RAB any capital contributions of network assets. However, capital expenditure related to third party funded network changes is deemed prudent and may be included in the RAB. The ԭ understands that NBN Cos intention is that any funds received from a third party in relation to the network change will also be specified as revenue. NBN Co proposes a number of changes to these provisions, and associated definitions, in its September submission, to address confusion. In response to NBN Cos submission, the Notice to Vary adopts the following variations: the definition of Revenue now states that this includes monies received by NBN Co from a third party in relation to a third party funded network change; the definition of Third Party Funded Network Change now states that the funding arrangement with the third party must have a zero or positive net present value; the definition of Capital Expenditure now states that this only includes capital expenditure incurred by NBN Co or a related body corporate of NBN Co (as opposed to a capital contribution from a third party); and the phrase excludes any capital contributions of network assets has been removed from clause 1D.2.1(b) in Schedule 1D. These changes clarify how NBN Co intends the SAU to operate in relation to third party funded network changes, and also reduce confusion about which types of capital expenditure may be included in the RAB. These changes also ensure that NBN Co will not be under or over-compensated in the SAU. Under the Notice to Vary, capital expenditure from third parties will operate as follows: If a third party incurs capital expenditure for an asset and this asset is subsequently given to NBN Co after it is constructed, this expenditure will not be included in NBN Cos RAB. If NBN Co (or a related body corporate) incurs capital expenditure in response to a third party request and this expenditure is fully or partially funded by a third party (for example, if a local council pays for a local extension of the NBN fibre network), this expenditure may be included in the RAB and the third party funds will be recognised as revenues under the SAU. Operating Expenditure The Notice to Vary amends the definition of Operating Expenditure to clarify that any amounts relating to capital gains tax will not be included in operating expenditure. As proposed by NBN Co in its submission to the Draft Decision (and adopted by the ԭ in the draft Notice to Vary), capital gains will be reflected in NBN Cos taxable profits. NBN Co will receive an allowance for capital gains tax through the net tax allowance and will therefore not need to be compensated for this through operating expenditure. Long-term revenue constraint methodology in Module 1 Module 1 of the 18 December 2012 SAU includes methodologies for calculating the Regulatory Asset Base (RAB), initial cost recovery account and the building block components that make up annual revenue requirements. These methodologies would be applied annually by NBN Co. The draft Notice to Vary provided the ԭ with a role calculating these values by applying the methodologies in the SAU on ex-post basis. Under this proposal, the values of the LTRCM will be published in an annual LTRCM Determination by the ԭ. This section sets out the variations the ԭ is proposing to the overall administration of the long-term revenue constraint methodology and particular variations to the capital expenditure and operating expenditure provisions, in response to submissions. General comments on the long-term revenue constraint methodology in Module 1 In Optus submission, Optus raises a number of concerns with the overall approach to the long-term revenue constraint methodology in the draft Notice to Vary. In particular: Optus submits that the approach adopted should ensure that the ԭ does not unnecessarily restrict its ability to adjust the RAB or other LTRCM values between periods, where such variation would promote the long-term interests of end-users. It considers that this would be consistent with the ԭs powers under Part XIC of the CCA. Optus reiterated its views put forward in its previous submissions that the ԭ should have the ability to use both ex-post and ex-ante review powers to ensure efficient expenditure, and be able to use all information before it to assess the efficiency of capital and operating expenditure proposals. Optus reiterates its preference for consistent powers between all ԭ regulatory determinations/undertakings in the telecommunications markets. It submits that the SAU should be varied to include provisions similar to that in the Wholesale ADSL Final Access Determination which enables the ԭ to assess the prudency of capital expenditure with regard to Telstras fixed line network, and proposed two approaches to implement these variations. Optus argues that it would be a perverse outcome if the effect of the SAU were to provide the ԭ with less ability to review efficiency of new fixed-line monopolies than was provided over the old fixed-line monopolies. The Notice to Vary retains the same overall approach for determining the values of the LTRCM in Module 1 as proposed in the draft Notice to Vary. This includes the ex-post approach to determining the values of the RAB and other LTRCM values and the ex-post approach to capital and operating expenditure and the methodologies for determining prudent capital and operating expenditure. The reasons for adopting this approach are outlined in both the ԭs Draft Decision on the 18 December 2012 SAU and the Response to Submissions for the draft Notice to Vary, which take into account the views put forward by Optus in previous submissions. The ԭ has received any further information that would warrant adopting a different conceptual approach to determining the values of LTRCM. The ԭ has however made a number of amendments to the process for calculating the LTRCM values and particular aspects of the methodologies for determining prudent capital and operating expenditure, in response to submissions. These are set out through the remainder of this section. Administration of long-term revenue constraint methodology in Module 1 The draft Notice to Vary imposes a number of administrative requirements on the ԭ in assessing and issuing an LTRCM Determination. This includes requirements to consult with and inform NBN Co and interested parties, to issue a draft determination and to issue a final determination within twelve months. Requirements for consulting on and issuing an LTRCM Determination In NBN Cos submission: NBN Co considers that the timeframe for the ԭ to make an LTRCM Determination should be nine months rather than twelve months. It argues that a twelve month timeframe could result in NBN Co not receiving the ԭs LTRCM Determination in respect of one year until the same day that it lodges its reports to the SAU in respect of the subsequent year. It considers that this is problematic given the cumulative nature of many of the calculations in the LTRCM, and the possibility that there may be some relevant guidance in an LTRCM Determination in regard to how NBN Co should report on certain matters in subsequent year. NBN Co considers that, in addition to the existing requirements in the draft Notice to Vary that the ԭ must publish a draft LTRCM Determination, the mechanism should also include a requirement to consult on the draft LTRCM Determination and consider any submissions received. It argues that this will provide for appropriate consultation with interested parties on the draft LTRCM Determination. In response to NBN Cos submission, the Notice to Vary now includes a requirement that the ԭ must consult on a draft LTRCM determination and consider any submissions it receives. This will provide NBN Co and other interested parties with an opportunity to consider and provide submissions on the ԭs proposed values for the LTRCM prior to it being finalised. The ԭ considers that this will have appropriate regard to NBN Cos legitimate business interests, as well as having regard to the interests of persons who have rights to use NBN Cos declared services. The ԭ has retained the twelve month timeframe for making an LTRCM Determination, rather than adopt the nine months as proposed by NBN Co. In relation to NBN Cos argument in support of nine months, the only information NBN Co is required to provide the ԭ within the twelve month timeframe are forecasts of expenditure for the following financial year on 30 June. NBN Co is not required to provide the ԭ with any calculations for its LTRCM inputs (for example, opening RAB and ICRA) for the following financial year until 31 October that is, four months after the latest date the ԭ may issue its LTRCM Determination for the previous financial year. The ԭ considers that four months is sufficient time for NBN Co to take into account how the values determined by the ԭ in the LTRCM Determination will affect NBN Cos proposed LTRCM values for the next financial year. Disclosure of confidential information in an LTRCM Determination In NBN Cos submission, it expresses concern that the mechanism in the draft Notice to Vary has no explicit recognition of the need to protect NBN Cos confidential information in an LTRCM Determination. It considers that, as part of making an LTRCM Determination, the ԭ may be provided with a range of confidential information by NBN Co and this must be subject to appropriate protections. To address these concerns, NBN Co proposes that the SAU include two clauses that state that: in issuing an LTRCM Determination, any information contained in the determination that is confidential to NBN Co or another person must only be disclosed in accordance with the ԭs confidentiality procedures; and in issuing an LTRCM Determination, the ԭ must not permit the disclosure of the confidential information of NBN Co to a third party, except pursuant to confidentiality arrangements between NBN Co and that third party. The CCA and the general law already impose obligations in relation to how the ԭ should deal with confidential information received from NBN Co or other parties. The ԭ considers that these obligations adequately address NBN Cos concerns in respect of confidential information. That said, for the purposes of clarification, the ԭ has included in the Notice to Vary the clauses proposed by NBN Co, with one amendment. The amendment will mean that the ԭ would be permitted by the SAU to disclosure confidential information to a third party when it is permitted or required by law. This is to ensure that the clause would not be at odds with circumstances that may arise under which the ԭ is required or permitted to disclose the information by law. Capital expenditure Under Module 1 of the 18 December 2012 SAU, NBN Co may include in its RAB all actual expenditure that: satisfies the Prudent Design Condition capital expenditure that is materially consistent with or within the scope of NBN Cos Network Design Rules, a permitted variation to these rules or an endorsed network change; satisfies the Prudent Cost Condition capital expenditure incurred using a competitive tendering and procurement process that comply with the NBN Co Procurement Rules, or comply with a number of other means of procurement or circumstances; or is deemed to have been prudently incurred. As noted above in section  REF _Ref366238175 \r \h 6.2.1, the draft Notice to Vary provided the ԭ with a role to determine whether NBN Cos capital and operating expenditures satisfy the prudency requirements set out in the SAU and to calculate the value of the capital expenditure to be included in the RAB. The draft Notice to Vary also proposed variations to the Prudent Cost Condition, the permitted variations provisions and the network change endorsement provisions. This section sets out the variations the ԭ has adopted in the Notice to Vary (including changes and additions to the draft Notice to Vary in response to submissions) to the prudency provisions that apply to capital expenditure, including to the Prudent Cost Condition, the benchmarking of previously incurred expenditure and the network change endorsement provisions. The process for determining prudent capital expenditure in the Notice to Vary, incorporating the changes as outlined in this section, is described in Attachment B. Prudent cost condition The variations to the Prudent Cost Condition as contained in the draft Notice to Vary are described in detail in the Response to Submissions. In NBN Cos submission: NBN Co proposes that capital expenditure incurred on arms length terms and in commodities market should not be limited to factors that the ԭ will have regard to when considering the extent to which competitive process has been engaged in. It states that the intention of including the arms length transactions category is to ensure that transactions that involve arms length parties negotiating appropriate terms and conditions are recognised as a legitimate and efficient method of procuring capital expenditure. Similarly, it argues that capital expenditure on goods and services purchased in commodities markets are also efficiently incurred. NBN Co proposes that the exceptional circumstances clause should also recognise a legal or regulatory requirement imposed on NBN Co regarding a particular procurement. It submits that, if NBN Co is required to procure a good or service in accordance with such a requirement, this is a relevant factor the ԭ should take into account when assessing compliance with the Prudent Cost Condition. NBN Co proposed SAU drafting to reflect this intent. In Optus submission, it expresses concern about the reliance on compliance with Procurement Rules to assess prudency because these Rules are not yet drafted. Optus provides an example in which NBN Co may include a catch-all condition in the Rules that permits the CEO to sign-off compliance. Optus submits that the assessment of prudency be made against the powers under Part XIC of the CCA. As noted previously, the Notice to Vary does not propose to change the overall approach to determining the prudency of capital expenditure, including the methodologies. However, in response to the views in submissions, and further consideration of the approach to determining prudent capital expenditure, the ԭ proposes some specific variations to the Prudent Cost Condition to that contained in the draft Notice to Vary, as follows. Competitive tendering and other means of procurement In the draft Notice to Vary, the Prudent Cost Condition would be met if the ԭ is satisfied that NBN Co incurred capital expenditure pursuant to a contract entered into in accordance with a competitive tendering and procurement process and which includes a process for the management of the design, engineering and construction of the relevant asset through a process of contract variations which provides: that reasonable consideration be given to managing the risk of such contract variations; for the provision of clear documentary evidence regarding the nature and reasonableness of any such contract variations; and that the design, engineering and construction of the Relevant Assets falls within the scope of such a process. In considering whether it is satisfied of this condition, the ԭ would have regard to: whether the contract was entered into in accordance with NBN Cos procurement process, including in accordance with the Procurement Rules; whether the contract was entered into on arms length terms; whether the contract entered into was in respect of a good or service in an open and competitive market (for example, a commodity market); and any other factor the ԭs considers relevant. The ԭ accepts NBN Cos argument that incurring capital expenditure in an open and competitive market, or on arms length terms, reflect efficient means of procuring capital expenditure. As such, in the Notice to Vary, any capital expenditure that the ԭ is satisfied was incurred by these means will be considered prudent and included in the RAB (subject to also satisfying the Prudent Design Condition). As a consequence of this change, the Notice to Vary also extends the requirements that NBN Cos contracts includes a process for the management of the design, engineering and construction of the relevant asset through a process of contract variations to those contracts entered into on arms length terms; when there is only one potential supplier; or where there are exceptional circumstances. In relation to Optus concern about the reliance on compliance with Procurement Rules to assess prudency, the ԭ notes that the Procurement Rules are only a factor that the ԭ must have regard to when assessing whether capital expenditure was incurred subject to a competitive tendering and procurement process. The ԭ can also have regard to any other factors it considers relevant. This means that the ԭ does not necessarily have to be satisfied that the capital expenditure is prudent simply because it was incurred in accordance with NBN Cos Procurement Rules. The efficiency of contracts under material changes in circumstances As previously noted, in the draft Notice to Vary, capital expenditure may be included in the RAB if the ԭ is satisfied that it has been incurred pursuant to a contract that has been procured through an efficient means of procurement (for example, competitive tendering) and complies with a prudent network design (as set out in the SAU). In the absence of a broader ex-post efficiency test, the ԭ is satisfied that incurring capital expenditure through an efficient means of procurement will mean that the associated capital expenditure should broadly reflect efficient capital expenditure. However, the ԭ recognises that NBN Co will likely enter into long-term contracts for the design, engineering and construction of the Relevant Assets, including for the entirety of Module 1. This means that an item of capital expenditure incurred in the final year of Module 1 could be incurred pursuant to a contract entered into at the beginning of Module 1. This raises a potential question of whether a procurement process that results in efficient expenditure in year one will still lead to efficient expenditure by the end of Module 1, in particular when there are material changes to the design, engineering and construction of the Relevant Assets. As a commercial reality, the ԭ recognises that for minor changes to the design, engineering and construction of the Relevant Assets, it may be most efficient for NBN Co to make variations to its existing contracts (and in many cases these circumstances would be recognised in the contracts themselves). In these circumstances, the associated capital expenditure is still likely to be efficient. However, for significant and material changes to the design, engineering and construction of the Relevant Assets, a question arises as to whether any capital expenditure for these changes which are incurred pursuant to a long-term contract can still be considered to represent an efficient outcome, and whether it is prudent for NBN to retender for its services or find another potential supplier in incurring the capital expenditure In light of this, the Notice to Vary includes a new provision which provides that, if there is a material changes in circumstances, the ԭ must also be satisfied that NBN Co has considered whether to incur capital expenditure through making variations to its existing contracts, or whether to incur the capital expenditure through a new contract that has been procured efficiently (for example, through a new competitive tender process). If the ԭ is satisfied that NBN Co has reasonably considered these options, the corresponding capital expenditure will be included in the RAB. To provide certainty to NBN Co as whether a material change in circumstance has occurred, the Notice to Vary defines a material change in circumstance as the following: A material change in circumstances occurs if there is a variation, change or enhancement to the design, engineering and construction of the Relevant Assets and the estimated capital expenditure associated with the implementation of that variation, change or enhancement of the Relevant Assets exceeds or is expected to exceed the Minor Expenditure Limit. In the Notice to Vary, the Minor Expenditure Limit is defined as $50 million at the SAU Commencement Date, and thereafter increased annually by CPI. Expenditure associated with legal, policy, regulatory or administrative requirements The 18 December 2012 SAU provides for NBN Co to recover capital expenditure associated with a Shareholder Minister, legal, policy, regulatory or administrative requirement. For example, under the Prudent Design Condition, NBN Co is permitted to make variations to the design, engineering and construction of the Relevant Assets in order to comply with a legal, policy, regulatory or administrative requirement. This means NBN Co may recover capital expenditure associated with these requirements if NBN Co also incurs the relevant capital expenditure through an efficient means of procurement (for example, competitive tendering). However, the ԭ recognises that the draft Notice to Vary did not address circumstances where NBN Co is required to procure capital expenditure in a particular way as specified by a legal, policy, regulatory or administrative requirement (for example, requiring NBN Co to procure capital expenditure in a particular period of time or with a particular supplier). In these circumstances, it may be unclear whether the associated capital expenditure would satisfy the Prudent Cost Condition and be included in the RAB. To address this concern in the Notice to Vary, capital expenditure that was procured in a manner required or rendered desirable by legal, policy, regulatory or administrative requirement, or a requirement of the Shareholder Ministers is something the ԭ can now have regard to when determining whether exceptional circumstances exist. This will mean that if NBN Co is required by law, policy or regulation to procure capital expenditure in a particular way which means it is not desirable or practicable to procure the expenditure through a competitive tender, for example, the expenditure may still be included in the RAB. Internal capital expenditure The capital expenditure provisions in the draft Notice to Vary relate primarily to the contracts that NBN Co enters into with third parties in relation to designing, engineering and constructing the Relevant Assets. Upon further consideration, the ԭ considers that it is unclear from these provisions how the ԭ would be satisfied of the prudency of capital expenditure that is not in relation to a third party contract (or otherwise referred to as internal capital expenditure). This may include expenditure incurred by NBN Co on the design of a Relevant Asset and expenditure associated with managing third party contracts for the construction of Relevant Assets. Consequently, the Notice to Vary makes it explicit how the ԭ will assess the prudency of this expenditure. The approach adopted in the Notice to Vary is that an item of internal capital expenditure may be included in NBN Cos RAB if the ԭ is satisfied that the operating expenditure was incurred in a manner that seeks to achieve value for money and the lowest total cost of ownership. This test is consistent with the approach to internal operating expenditure in the 18 December 2012 SAU, and is discussed further in section  REF _Ref367370744 \r \h \* MERGEFORMAT 6.2.4 about operating expenditure. ԭ substitute value of capital expenditure In the draft Notice to Vary, the ԭ would be able to determine a substitute amount of capital expenditure to include in the RAB, in the event that the ԭ is not satisfied that NBN Cos capital expenditure was incurred in accordance with the capital expenditure methodologies in the SAU. This substitute amount is primarily based on prior capital expenditure that has been included in the RAB (or otherwise known as historical benchmarking). The reasons for adopting this approach are set out in the Response to Submissions. In NBN Cos submission, it proposes that the historical benchmarking clause should not be limited to failures to meet the Prudent Cost Condition, and should apply to the extent that the ԭ is not satisfied that capital expenditure meets either or both of the Prudent Design Condition or the Prudent Cost Condition (or the deemed categories of expenditure). It argues that capital expenditure may, in some circumstances, fall outside the scope of the Network Design Rules or Permitted Variations (and have not been through the Network Change process). In these circumstances, NBN Co considers that access seekers may still obtain a benefit from the capital expenditure and accordingly the ԭ should be able to determine a level of capital expenditure that should be included in the RAB. In Optus submission, it disagrees that prudency of capital expenditure should be assessed with reference to consistency with previous years. It argues that, depending on its implementation, this will enable NBN Co to entrench cost inefficiencies in an industry that exhibits declining capital expenditure cost trends, noting that NBN Co has committed to declining capital expenditure over time in its Corporate Plan for 2012-15. Optus submits that this could be addressed by removing references to consistent with capital expenditure that has been included in the RAB in respect of a prior financial year and replace with consistent with capital expenditure that has been included in Corporate Plan forecasts and other data provided to Parliament. As noted by the ԭ previously, the ԭ considers that efficient investment would be enhanced if the ԭ were to determine the values that roll into the RAB in accordance with the SAU methodologies. This includes determining the values of capital expenditure that is materially consistent with or within the scope of the Network Design Rules and permitted variations. Under NBN Cos proposal in its submission, if the ԭ was not satisfied that capital expenditure was incurred in accordance with the Prudent Design Condition, NBN Co would nevertheless be given an amount of capital expenditure in the RAB as determined by the ԭ. The ԭ does not consider that it is necessary that capital expenditure that does not satisfy the Prudent Design Condition be included in the RAB. This is because the Network Design Rules and the permitted variations provisions in the Prudent Design Condition provide NBN Co with considerable flexibility to design, engineer and construct its networks as it is sees fit to implement the Governments objectives for the NBN. Furthermore, in circumstances where NBN Co wishes to vary the network design and it considers that access seekers will obtain a benefit from the capital expenditure, NBN Co will be able to seek ex-ante endorsement for these network design changes from access seekers or the ԭ (as discussed in section  REF _Ref366575855 \r \h 6.2.3.3). Consequently, in the Notice to Vary, the ԭ has not adopted NBN Cos proposal. However, the ԭ has amended the relevant clauses to address circumstances in which capital expenditure is associated with an asset that is partially within the scope of the Network Design Rules, a permitted variation or an endorsed network change. This will mean that NBN Co will not be prevented from recovering capital expenditure associated with this partially prudent asset. In relation to the ԭs ability to determine a substitute value of capital expenditure based on capital expenditure previously included in the RAB, the ԭ notes that the use of prior capital expenditure is a pragmatic solution given that the lack of appropriate benchmarks for NBN Cos capital expenditure. However, the ԭ recognises Optus concern that relying on previous capital expenditure that has been included in the RAB may in some circumstances enable NBN Co to entrench cost inefficiencies. To address this issue, the Notice to Vary allows the ԭ to have regard to the NBN Co Corporate Plan that was applicable at the time the capital expenditure was incurred when determining a substitute value of capital expenditure. This will mean that the ԭ can have regard to cost savings that were projected in the relevant Corporate Plan for the construction of particular assets. This will ensure that any substitute value does not reflect prior capital expenditure that is no longer considered to be efficient, including by NBN Cos own projections as set out in the relevant Corporate Plan. The approach to determining whether capital expenditure will be included in the RAB in the Notice to Vary will operate as follows: The ԭ will first determine whether NBN Cos capital expenditure satisfies the Prudent Design Condition, the Prudent Cost Condition or was incurred in connection with a number of deemed prudent categories. If the ԭ is satisfied of these matters, the capital expenditure will be included in the RAB. If the ԭ is not satisfied that the capital expenditure was incurred in connection with a deemed prudent category, the ԭ would then consider whether the capital expenditure satisfies the Prudent Design Condition and Prudent Cost Condition. If the ԭ is not satisfied that the capital expenditure satisfies the Prudent Design Condition, then that capital expenditure will not be included in the RAB. In practice, this will apply to two types of capital expenditure: Capital expenditure associated with an asset that as a whole does not satisfy the Prudent Design Condition (for example, a new satellite that is not contemplated by the Network Design Rules). In this circumstance, the entire amount of capital expenditure will not be included in the RAB. Capital expenditure associated with an asset that partially satisfies the Prudent Design Condition (for example, a cable or piece of active equipment that included more capacity than required under the Network Design Rules). In this circumstance, the ԭ would determine the proportion of capital expenditure associated with this asset that it considered was consistent with the Network Design Rules and only include this expenditure in the RAB. If the ԭ is not satisfied that the capital expenditure satisfies the Prudent Cost Condition (but otherwise satisfies the Prudent Design Condition), then that capital expenditure will not be included in the RAB and the ԭ would determine a substitute amount of capital expenditure. The ԭs substitute amount of capital expenditure must be consistent with capital expenditure that has been included in the RAB in respect of any prior financial year of the SAU term, having regard to: the relative amounts of the Capital Expenditure incurred in those Financial Years; the relative cost of relevant goods or services in those Financial Years; any relevant differences in the scale and scope of the Relevant Assets in connection with which the Capital Expenditure was incurred in those Financial Years; the NBN Co Corporate Plan applicable at the time the Capital Expenditure was incurred; and any other matter the ԭ considers relevant. Customer engagement process for endorsing network changes Module 1 of the 18 December 2012 SAU contains a process for NBN Co to seek customer endorsement of proposed network changes. The process makes use of the PDF (and the associated PDF Processes) to engage and consult with customers on a proposed network change. If a network change is endorsed by customers, then the capital expenditure associated with that network change may be included in the RAB. The draft Notice to Vary proposed to reduce the term of the customer engagement provisions to five years, rather than the full term of Module 1. As discussed in section  REF _Ref366238605 \r \h 4.1.1, the draft Notice to Vary also proposed to reduce the term of the PDF Processes to five years. In NBN Cos submission: NBN Co considers that there needs to be a workable approach to network changes after five years in the event that a replacement set of PDF Processes are not in place. NBN Co proposes minor variation to clause 1D.6 (Product Design Condition for capital expenditure) to allow the ԭ to approve a network change if there is no active customer engagement process in place. It argues that this ensures that there is no gap in the SAU which would prevent an otherwise prudent network change from being able to be adopted and any associated capital expenditure included in the RAB. NBN Co proposes that the definition of network change should continue to operate for the full period of Module 1, rather than expire after five years, to support the change made to clause 1D.6. The ԭ acknowledges that, in the absence of a process in the SAU for endorsing changes to the network design after the initial five year period, the SAU may prevent otherwise prudent capital expenditure from being included in the RAB during this period. In the Response to Submissions, the ԭ stated that this concern can be overcome with NBN Co proposing an SAU variation that includes an extension and/or revision of the current customer engagement provisions. However, the ԭ recognises that this does not ensure that there will be a set of customer engagement processes in place after five years and therefore may not provide certainty to NBN Co that it will be able to recover the capital expenditure associated with prudent network changes. The ԭ has adopted NBN Cos proposal to allow the ԭ to approve a network change if there is not active customer engagement process in place. The ԭ has amended the drafting to ensure that any approval by the ԭ can be made via a Regulatory Determination made by the ԭ, which may include a replacement set of customer engagement processes. The ԭ considers that these changes will address the concerns raised by NBN Co in relation to whether NBN Co may adopt a prudent network change and include the associated capital expenditure in the RAB, while also ensuring that the customer engagement provisions may be revisited after five years in light of operational experience. The ԭ considers that these changes will promote the encouragement of efficient investment by NBN Co. The ԭ has also amended clause 1D.7.4 (d) of the Notice to Vary to clarify how the Prudent Design Condition is to be satisfied when there are changes to the Network Design Rules. The amended clause provides that if there is a change to the Network Design Rules, in the first instance the revised version of the Network Design Rules will apply to any new capital expenditure, while the previous version will apply to construction that is in progress at the time the Network Design Rules are changes. The revised clause also allows for NBN Co to propose an alternative approach for determining which version of the Network Design Rules is to apply to capital expenditure and for this proposal to be reviewed by the ԭ. Operating expenditure In the draft Notice to Vary, the ԭ proposed an approach to determining the prudency of operating expenditure that was largely identical to the approach proposed for capital expenditure. This approach is described in the Response to Submissions. In NBN Cos submission: NBN Co submits that the amendments it proposes to the capital expenditure provisions (for example, in relation to arms length transactions and commodities markets and regulatory requirements imposed on NBN Co) should also be applied to the operating expenditure provisions. NBN Co proposes a number of other minor amendments to the provisions. In Optus submission: Optus states that, while the conditions in clause 1F.8.2 and 1F.8.3 refer to third party operating expenditure, no reference is made to the internal opex of NBN Co (for example, staff costs, building rent, etc.). Optus has previously noted that such expenditure should be able to be benchmarked across the industry (for example, staff costs) or market (for example, rent costs). Optus recommends that the SAU be varied to state that prudency be assessed against NBN Co forecast statements and documents, such as Corporate plans and other public documents. It submits that this could be addressed by replacing references in clause 1F.8.2(c) with consistent with capex that has been included in Corporate Plan forecasts and other data provided to Parliament. Optus submits that the ԭ should be able to assess opex as not being prudent where there is sufficient evidence supporting such a conclusion, notwithstanding compliance with the yet to be written Procurement Rules. In the Notice to Vary, the provisions relating to operating expenditure mirror the provisions relating to capital expenditure, including the proposed changes to the means of procuring operating expenditure and material changes in circumstances. The reasons for making these changes are set out in section  REF _Ref366238637 \r \h 6.2.3.1 about capital expenditure. In relation to the internal operating expenditure of NBN Co (for example, staff costs, building rent and other overheads), the ԭ accepts that it is unclear in the draft Notice to Vary how the ԭ would be satisfied of the prudency of NBN Cos internal operating expenditure. This is because the provisions in the draft Notice to Vary deal primarily with operating expenditure that has been incurred pursuant to a contract with third parties. Consequently, the Notice to Vary makes it explicit how the ԭ will assess the prudency of this expenditure. The approach adopted in the Notice to Vary is that an item of internal operating expenditure may be included in NBN Cos annual revenue requirements if the ԭ is satisfied that the operation expenditure was incurred in a manner that seeks to achieve value for money and the lowest total cost of ownership. This test is consistent with the approach to internal operating expenditure in the SAU. The process for determining prudent operating expenditure in the Notice to Vary, incorporating the changes as outlined, is described in Attachment C. Long-term revenue constraint methodology in Module 2 This section sets out the variations that the ԭ is proposing in relation to the following terms and conditions in the long-term revenue constraint methodology in Module 2: the approach to rolling forward the RAB; the use of actual versus forecast revenue in the calculation of the initial cost recovery account; and the criteria for determining the rate of return. Terms and conditions relating to rolling forward the RAB Clause 2D.7 of Schedule 2D of the 18 December 2012 SAU sets out how the RAB will be rolled-forward over the duration of Module 2. This clause establishes that the RAB would be updated each year by adding the actual capital expenditure incurred by NBN Co in the previous year, and deducting asset disposals and forecast levels of depreciation. In the Draft Decision, the ԭ noted that it could not be satisfied that efficient investment and expenditure would be encouraged over the term of Module 2 if it were prescribed that the RAB would always be updated based on actual capital expenditure. To address this, the ԭ proposed in the Consultation Paper that: the SAU be varied to remove the requirement that the RAB be rolled-forward during Module 2 based on actual capital expenditure, actual depreciation and asset disposals; and the SAU be varied to require that the RAB be rolled forward based on prudent capital expenditure, depreciation and asset disposals. The Consultation Paper noted that this would mean that the manner in which the RAB would be rolled forward (including the potential inclusion of additional efficiency incentive mechanisms) could be: proposed in a variation to the SAU following the expiry of Module 1the proposal would then be assessed with regard to the statutory criteria in Part XIC at that time; or determined by the ԭ in an Access Determination. In response, NBN Co proposed that instead of locking in a method of rolling forward the RAB for the duration of Module 2, that the RAB should be rolled forward in accordance with RAB roll-forward arrangements which would be determined before each regulatory cycle through the replacement module process. The ԭ considered that the concept of RAB roll-forward arrangements was appropriate and adopted them in the draft Notice to Vary. However, the ԭ did not adopt all aspects of the drafting proposed by NBN Co that would give effect to these arrangements. The key differences between NBN Cos proposal and the draft Notice to Vary were: Including additional options for how capital expenditure and regulatory depreciation will be treated in rolling-forward the RAB. These additional options would allow other methods adopted in any other regime for the economic regulation of infrastructure services to be adopted in the RAB roll-forward arrangements. These options would provide flexibility for NBN Co and the ԭ to adopt a wider range of methods for rolling forward the RAB than the specific methods proposed by NBN Co, in the event that the ԭ considered these methods to no longer be reasonable at the time of assessing a replacement module. The removal detailed criteria proposed by NBN Co by which the ԭ would be required to undertake its ex-post assessment of capital expenditure. Not specifying criteria in Module 2 would ensure that any criteria put in place (through the replacement module process) would be adaptable in response to changing circumstances and would encourage efficient investment across a range of possible future scenarios. Drafting amendments to align the structure of the RAB roll-forward provisions with other aspects of the LTRCM provisions in Module 2 and to clarify that the return on assets is to be calculated using a forecast of the rolled-forward RAB value. Submissions to draft Notice to Vary In response to the draft Notice to Vary, NBN Co raised the following concerns: The RAB roll-forward equation in the draft Notice to Vary is expressed on a regulatory cycle basis rather than an annual basis. This creates ambiguity as to how to apply any option for the RAB roll-forward that relies on knowing in which year within a regulatory cycle capital expenditure was rolled into the RAB. For example, a method that relies on this information is calculating depreciation based on the value of capital expenditure rolled into the RAB. To address this, NBN Co proposes amendments to revert to an annual basis for the RAB roll-forward equation. There is not a clear sequence of options for either the method for determining the amount of capital expenditure to be included in the RAB, or the method for determining depreciation. NBN Co considers that specifying such a sequence (with a clear role for the ԭ in assessing the reasonableness of options in the order of the sequence), would provide an appropriate measure of stability and predictability for NBN Co, access seekers and their end-users in regard to future RAB roll-forward arrangements. NBN Co has proposed amendments that provide for options for the treatment of capital expenditure and depreciation in the RAB roll-forward to be assessed in order of sequence: For capital expenditure, NBN Co proposes that the first option is to roll in actual capital expenditure, and this option is to be used if the ԭ is satisfied that the method is reasonable. If this is not the case, then NBN Co proposes that the second option, again to be used if the ԭ is satisfied that the method is reasonable, is to allow the amount of capital expenditure rolled-in to the RAB to be related to the forecast capital expenditure as used to calculate the Nominal Forecast ABBRR for that regulatory cycle. For depreciation, NBN Co proposes that the first option is real straight line depreciation, and this option is to be used if the ԭ is satisfied that the method is reasonable. In applying the depreciation method in respect of capital expenditure, the relevant amount of depreciation will be based on either the value of capital expenditure rolled-in to the RAB for that Financial Year, or the value of the forecast capital expenditure for that Financial Year as used to set the Forecast Nominal ABBRR, if the ԭ is satisfied that either method is reasonable. For each of capital expenditure and depreciation, NBN Co proposes that the final option, should the ԭ consider other options to not be reasonable, should be consistent with NBN Co achieving a reasonable likelihood of long term recovery of prudently incurred costs. This contrasts with the alternative approach adopted in the draft Notice to Vary, which is based around methods used in other regimes. NBN Cos proposed alternative provides flexibility to both adopt and to innovate, as circumstances demand, but subject to the method being relevant to NBN Cos context. In response to the draft Notice to Vary, Optus noted the following: Optus supports the roll-in of capital expenditure that is consistent with previously approved forecasts, and where capital expenditure is greater than the approved forecast it can be reviewed by the ԭ. Optus does not see the need for the restriction on the ability of ԭ to assess whether the capital expenditure above the approved forecast is consistent with Part XIC of the CCA. The ability of the ԭ to exercise its powers under Part XIC should not be restricted by conditions agreed in previous regulatory cycles (which could be a period up to five years earlier). Optus strongly recommends that the SAU contain no additional obligations/restrictions on the ԭ above that imposed by Part XIC of the CCA. All assessments of the reasonableness of NBN Co proposals should be consistent with the CCA. No other submissions commented on RAB roll-forward arrangements. ԭ position on RAB roll-forward arrangements The ԭ has given further consideration to the RAB roll-forward arrangements in light of submissions to the draft Notice to Vary. The ԭ has made further changes to the RAB roll-forward provisions in the Notice to Vary. These include some, but not all, of the variations proposed by NBN Co in its submission to the draft Notice to Vary. These issues are discussed in the following section. Specification of the RAB roll-forward equation The ԭ agrees with NBN Cos comments regarding the specification of the RAB roll-forward equation and that the equation should be specified on an annual rather than a cyclical basis. The ԭ has therefore adopted in the Notice to Vary the equation proposed by NBN Co in its submission to the draft Notice to Vary. The ԭ has also made a range of consequential amendments to other clauses within the RAB roll-forward provisions to accommodate this change. Sequencing of RAB roll-forward options The ԭ notes that the RAB roll-forward approach in the draft Notice to Vary provides NBN Co with certainty at the commencement of a regulatory cycle about how the RAB will be rolled forward at the end of that cycle. The ԭ considers that NBN Cos proposed approach seeks to provide NBN Co with a greater degree of certainty now about the likely RAB roll-forward approach that will be adopted for future regulatory cycles during Module 2. Under NBN Cos proposed approach, in making its own replacement module determination, the ԭ would be constrained by the order of the options for rolling in capital expenditure and accounting for depreciation, and could not adopt an option which the ԭ may consider to be more appropriate unless the ԭ first finds that the options higher in the order are not reasonable. The ԭ considers that the sequencing of RAB roll-forward options as proposed by NBN Co could have adverse implications regarding replacement module application process and the ԭs replacement module determinations. In particular, the ԭ considers that NBN Cos proposed approach would: appear to limit the ԭs ability to consider the interaction between capital expenditure and depreciation methods in making a replacement module determination in the event that the ԭ rejects NBN Cos replacement module application. NBN Cos proposal does not appear to contemplate that the reasonableness of the various options for capital expenditure and depreciation need to be considered together. NBN Cos proposed approach could compromise the ԭs ability to adopt appropriate combinations of capital expenditure and depreciation methods in replacement module determinations; reduce clarity around how the replacement module application process would operate due to the complexity of the default sequencing. In particular, it is not clear under NBN Cos proposed approach how NBN Co is constrained by the order of options for rolling in capital expenditure and accounting for depreciation; and confine the ԭ to adopting the first default option for each matter even though the ԭ may consider a later option to be more appropriate. The ԭ considers that on balance, these implications are likely to outweigh the potential benefits of providing further certainty to NBN Co regarding future RAB roll-forward arrangements. The ԭ has therefore not adopted NBN Co proposal to sequence RAB roll-forward options and has retained the general approach adopted in the draft Notice to Vary. Further, in arriving at this position, the ԭ has reconsidered whether it is reasonable for there to be an explicit option that specifies the roll-in of all actual capital expenditure (regardless of the approved forecast) in the SAU. Such an option is not consistent with the recent rule changes to the National Electricity Rules made by the AEMC. The ԭ notes that rolling forward the RAB using all actual capital expenditure (regardless of the approved forecast) was used in energy under the National Electricity Rules. In the AEMCs review of the National Electricity Rules, the method of rolling forward the RAB using all actual capital expenditure was found to create incentives for overinvestment and be a key driver of electricity price increases. In the Notice to Vary, the ԭ has removed all actual capital expenditure as an explicit option for rolling forward the RAB from the Notice to Vary. The ԭ has retained as an explicit option that capital expenditure up to the approved forecast will be automatically rolled in, with any capital expenditure above the forecast to be subject to ԭ review. In the event that actual capital expenditure exceeds the forecast, the forecast amount would be rolled in and the ԭ assesses the additional amount above the forecast amount. This would allow for actual capital expenditure to be rolled into the RAB if the ԭ considered the amount above the forecast level to be prudent and efficient. The ԭ has retained this as an explicit option because it represents a method that the ԭ consider could be a reasonable option for a regulatory cycle in Module 2. Whether this option is fact reasonable for a particular regulatory cycle will be assessed at the time when a replacement module application is assessed or when the ԭ makes its own replacement module determination. This is the method now in place in the National Electricity Rules following the AEMCs review. The ԭ also notes that this approach has been endorsed by Optus. The ԭ has adopted NBN Cos proposal that real straight line depreciation be specified in the SAU as an explicit option that may be adopted, in addition to specifying that the RAB may be rolled forward by using either forecast depreciation or depreciation on capital expenditure that is rolled into the RAB over a particular regulatory cycle. Fall-back options for RAB roll-forward The ԭ has adopted, with some further amendments, NBN Cos proposed fall-back option for the treatment of capital expenditure and depreciation in the RAB. Under NBN Cos proposal, this option would require that the method for including capital expenditure into and removing depreciation from the RAB must result in reasonable likelihood of long term recovery of prudently incurred costs. The ԭ considers that NBN Cos proposed fall-back would allow a range of options to be adopted for rolling forward the RAB, which is consistent with the original intention of including such an option, and is sufficiently broad to allow methods used in other regulated industries (particular those regulated by the ԭ and AER) to be adopted. The ԭ has made two further amendments to NBN Cos proposal in the Notice to Vary. First, the drafting has been amended to refer to prudently and efficiently incurred costs as opposed to prudently incurred costs. The ԭ considers that this amendment is required for consistency with other aspects of the LTRCM in Module 2, which does not confine the ԭs assessment of LTRCM to the concept of prudency. Second, the drafting has been amended to require the promotion of the long-term interests of end-users. The ԭ considers that this amendment is required to make it clear that the ԭ may consider a range of matters that are relevant to the long-term interests of end-users and at the same time give NBN Co the certainty that the roll-forward method will be consistent with NBN Co achieving reasonable likelihood of long term recovery of its prudent and efficient costs. Use of actual versus forecast revenue in the calculation of the initial cost recovery account In Schedule 2D of the 18 December 2012 SAU, it is specified that the ICRA will be rolled forward during Module 2 using forecasts of annual revenue. This differs from the method of rolling forward the ICRA during Module 1, which is done using revenues that are actually earned by NBN Co. In its Supporting Submission to the 18 December 2012 SAU, NBN Co stated that the use of forecast revenue in the ICRA roll-forward in Module 2 will strengthen the financial incentive it faces to price in such a way as to increase the likelihood of recovering its long-term costs, and it will enhance the incentive to improve the efficiency of expenditure. The ԭ has not previously proposed, in the Draft Decision or draft Notice to Vary, any amendments to the methodology for rolling forward the ICRA in Module 1 or Module 2. In its submission to the draft Notice to Vary, NBN Co states that due to other changes proposed in the draft Notice to Vary, the use of forecast revenue in the ICRA roll-forward in Module 2 is no longer necessary. NBN Co submits that issues may arise in the event that the ԭ chooses to intervene in regard to new product pricing or price rebalancing such as forecasts becoming invalid and that such issues would be reduced if actual revenue was used. Therefore, NBN Co proposes in its submission that the method of rolling forward the ICRA in Module 2 (that is, whether forecast or actual revenue is used) be determined during the replacement module process. In practice, this would mean that NBN Co would propose the use of forecast or actual revenue in a replacement module application, which would then be subject to ԭ assessment. NBN Co has provided drafting in its submission that gives effect to this proposal. Optus submits that the calculation of the ICRA in Module 2 should be based on actual revenue rather than forecast revenue, as the use of forecast revenue would create an incentive for NBN Co to understate forecast revenue. No other submissions provided views on this issue. The ԭ considers that using forecast revenue to roll-forward the ICRA can supplement existing incentives facing NBN Co (for example, price controls) to set prices in an efficient manner, and encourage the take-up and development of new products. The ԭ acknowledges that its role in relation to new prices and price rebalancing will also create incentives to set prices efficiently. The ԭ considers that the incentives NBN Co faces in relation to the setting of individual prices will change over time. The ԭ cannot be certain at this stage about whether the additional incentive created by the use of forecast revenue to roll-forward the ICRA in Module 2 will be necessary. Therefore, the ԭ considers that it is reasonable to determine periodically, via the replacement module process, whether forecast or actual revenue should be used to roll-forward the ICRA during Module 2. As such, the ԭ has incorporated NBN Cos proposed amendments into the Notice to Vary. The ԭ considers that this amendment would be consistent with other aspects of the replacement module process. For example, each replacement module application must include a RAB Roll-Forward Proposal which specifies a method for the roll-in of capital expenditure into the RAB and a method for accounting for depreciation in rolling forward the RAB. They must also include an LTRCM Proposal which includes, among other things, forecast revenue requirements and forecasts of the inputs into the revenue requirement. Under NBN Cos proposed drafting, the LTRCM Proposal would also include a proposal as to whether the ICRA will be rolled forward using forecast or actual revenue. Criteria for determining the rate of return In the draft Notice to Vary, the ԭ proposed that, during Module 2, the rate of return will be determined by estimating a nominal vanilla WACC having regard to the risks involved in making the investment. The ԭ noted that it did not consider it was objectionable for the SAU to specify that regard be had to the risks that NBN Co faces in investing. In reaching this view, the ԭ considered the fact that it is required, under subsection 152AB(7A) of the CCA, to have regard to the risks involved in making the investment. However, the ԭ noted that it was not satisfied that it is reasonable to specify that a benchmarking approach will always be adopted to determine NBN Cos financing costs, because a benchmarking approach to determining NBN Cos WACC parameters may not always be best regulatory practice. In its submission, NBN Co proposes that the clause that defines the rate of return to be a nominal vanilla WACC should refer to having regard to the risks in making the investment in the Relevant Assets. NBN submits that, without these words, the relevant context for the investment is not appropriately anchored to NBN Cos context. Parties other than NBN Co did not submit on the criteria for determining NBN Cos rate of return during Module 2. The ԭ understands NBN Cos concerns about the criteria for determining the rate of return being quite open in the absence of the words in the relevant assets. However, the ԭ is concerned that these words may suggest that the WACC could take on different values, based on the assets being invested in. The ԭ has also recognised the need for rate of return clause in Module 2 to refer to efficient financing practices, to ensure that the rate of return only compensates NBN Co for the risk it would face if it were financing its investment efficiently. Therefore, clause 2C.2.1(d) of the Notice to Vary states that the rate of return will be determined by estimating a nominal vanilla WACC for Financial Year t having regard to efficient financing practices and the risks involved in providing the NBN Access Service, Ancillary Services and the Facilities Access Service. Non-price terms and conditions The variations that are discussed in this section relate to the issues discussed in chapter 6 of the Draft Decision, section 2.5 of the Consultation Paper, section 2.5 of the Response to Submissions and Schedules 1A and 1H of the Notice to Vary. Dispute management In the draft Notice to Vary, the ԭ proposed to retain an amended version of the dispute management provisions. In its submission to the draft Notice to Vary, Telstra notes that significant progress has been made to address the potential for perceived and actual bias in decision-makers in the dispute resolution processes. However, Telstra suggests further detailed variations to the dispute management provisions to: provide that NBN Cos role in the appointment, management and termination of decision-makers is administrative only, and to increase the role of RSPs and the ԭ; and include standardised terms for the appointment of resolution advisors in the SAU. In relation to the first proposal, the ԭ does not consider that it is necessary to implement the majority of Telstras detailed drafting amendments, because the dispute management provisions in the draft Notice to Vary incorporate sufficient safeguards to ensure that decision-makers will be independent and free from bias. As noted in the Response to Submissions, NBN Co is required to consult with customers and access seekers in nominating decision-makers, and the ԭ has the power to approve the appointment and termination of decision-makers and approve guidelines for the resolution of disputes. However, the ԭ has adopted Telstras proposal to remove the provision relating to the termination of Panel Members (that is, clause 5.3 of Annexure 1 to Schedule 1I of the draft Notice to Vary). Telstra notes that this can be effected in accordance with the processes under the Commercial Arbitration Act 2010 (NSW) (CAA), and the ԭ understands that the dispute management terms in current SFAA-based Access Agreements provide that panel arbitration will be governed under the CAA. To reflect this approach, the ԭ has adopted Telstras proposed amendment, and has proposed drafting amendments to clause 1H.5 of the Notice to Vary to clarify that NBN Co must provide in SFAAs that the conduct of panel arbitrations includes a procedure for challenging panel members. The ԭ has also proposed to generally remove references to the CAA, to avoid any potential inconsistencies in the application of the dispute management provisions in the SAU and the provisions in the CAA. NBN Co and access seekers would nevertheless be able to agree to the application of the legislation that will govern arbitration processes (which could be the CAA) in their Access Agreements. In relation to the second proposal, the ԭ notes that Telstra considers that the inclusion of standard terms would avoid further consultation or decision-making about these terms during the dispute resolution process, and that Telstra has proposed detailed drafting for such terms. The ԭ considers that it is preferable for parties to commercially negotiate and agree to terms to the extent possible. Therefore, the ԭ has not included these detailed terms in the Notice to Vary. The ԭ also notes that NBN Co has proposed minor timing and wording adjustments to the dispute management provisions. The ԭ has included these minor variations in the Notice to Vary. POI-related matters In the draft Notice to Vary, the ԭ proposed a number of variations to the POI-related provisions. In its submission to the draft Notice to Vary, NBN Co proposes that the following clauses should be deleted: clause 1I.4.5, which provides that any ԭ regulatory determinations requiring NBN Co to provide additional information regarding the location of POIs would not be inconsistent with the SAU; and clause 1A.3.5, which provides that NBN Co will specify the POI for each CSA and may also utilise temporary POIs for providing interconnection to the NBN. In relation to clause 1I.4.5 of the draft Notice to Vary, the ԭ stated in the Response to Submissions that it included this commitment in light of Telstras submission to the Draft Decision, which proposed that NBN Co be required to provide additional information about POI migration processes and timeframes. The ԭ acknowledges NBN Cos argument that this clause could cause uncertainty about the intended role for regulatory determinations for other POI-related matters and in other areas of the SAU where such an explicit clarification is not made. Therefore, as the ԭ now considers that the inclusion of this commitment is unnecessary, the ԭ has deleted this clause from the Notice to Vary. In relation to clause 1A.3.5 of the draft Notice to Vary, the ԭ stated in the Response to Submissions that a number of variations were required to be made to this clause to ensure that interconnection is offered at locations which promote the long-term interests of end-users. Alternatively, the ԭ proposed that this clause be deleted, with the effect that the locations for interconnection with CSAs would be determined via commercial negotiations, or regulatory determinations where agreement cannot be reached. NBN Co submits that deletion is preferable, and notes that this would ensure that there can be no future potential inconsistency between the ԭs exercise of its existing powers under the CCA and the operation of this clause. Therefore, the ԭ is adopting its second proposed option, and has deleted this clause from the Notice to Vary. Removing these commitments would mean that NBN Co and access seekers could commercially negotiate and agree to terms and conditions for these matters, or if unable to be agreed, the ԭ would be able to address these terms through regulatory determinations. Retail-level regulatory requirements In its submission to the draft Notice to Vary, Telstra notes that it would welcome the inclusion of a general commitment to support retail-level regulatory requirements. Telstra submits that since NBN Co will indirectly set the terms and conditions of downstream supply through its SFAAs, the ability of RSPs to meet its regulatory commitments will be directly affected by the extent to which NBN Co enables this compliance. The ԭ has not adopted Telstras proposal. These proposed commitments are intended to support access seekers in complying with retail-level regulatory requirements that apply in downstream markets in respect of non-price terms and conditions (in particular, service level standards such as the Customer Service Guarantee and Priority Assistance arrangements). As the ԭ has taken the approach of removing most of the non-price terms and conditions from the SAU in their entirety (including the service level commitments), the ԭ considers that it is unnecessary to include commitments to support retail-level regulatory requirements in the SAU. The ԭ notes that it is open to NBN Co and access seekers to set the terms for this matter through commercial negotiations, or if unable to be agreed, the ԭ would be able to address these terms through regulatory determinations. Fixed Principles Under Part XIC, the ԭ must reject the SAU if it is not satisfied that the fixed principles term or condition meet certain criteria for the specified notional fixed period. In the draft Notice to Vary, the ԭ proposed to vary clause 5 of the Main Body of the SAU to specify that only the following terms and conditions included in Module 2 are fixed principles terms and conditions: the Regulatory Asset Base roll-forward equation; the fact that the annual revenue requirements will be calculated using the following building block components a return on capital, depreciation, operating expenditure and tax allowance; and the deemed prudent expenditure categories relating to the Telstra and Optus arrangements. In its submission to the draft Notice to Vary, NBN Co maintains the view that all of the terms and conditions in Modules 0 and 2 should be specified as a fixed principle, or at the least, the following terms and conditions should also be a fixed principle (in addition to the three matters identified by the ԭ): in Module 0 the expiry date of the SAU (clause 3.2); the fixed principles terms and conditions (clause 5.3); and in Module 2 the roll-forward of the ICRA (clause 2C.5.4); the maximum regulated prices for NBN Offers (clause 2B.2). NBN Co also submits that in the absence of the SAU specifying all of the terms and conditions in Modules 0 and 2 as a fixed principles term and condition, the SAU should include a series of acknowledgements to provide NBN Co with certainty that the accepted terms and conditions in Modules 0 and 2 will remain unaffected by the ԭs assessment of SAU variations during the replacement module process. The ԭ has not adopted the majority of NBN Cos proposals. According to the Explanatory Memorandum to the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010, fixed principles terms and conditions included in Special Access Undertakings operate in a similar manner to fixed principles provisions in Access Determinations, which are intended to provide greater regulatory certainty in certain circumstances. The terms and conditions that are specified as fixed principles will apply to subsequent undertakings, thereby providing certainty that those terms and conditions will continue under future access arrangements. Specifically, under Part XIC, the implication of specifying a term or condition as a fixed principles term and condition is that: once the SAU is accepted, if NBN Co wanted to submit a new SAU in relation to the same service or a variation to the SAU during the term of the SAU that contained the same fixed principles term and condition, it must include that term or condition in the new or varied SAU; and the ԭ would therefore not be able to reject the new SAU or the proposed variation to the SAU for a reason that concerns that term or condition (unless the specified qualifying circumstances exist). In effect, this means that in the ԭs future assessment of a new SAU or a variation to the SAU, the fixed principles are not subject to the statutory criteria. Therefore, the ԭ is concerned to ensure that it is not constrained in a way that prevents it from ensuring that the SAU only contains terms and conditions which promote the long-term interests of end-users and are reasonable over the term of the SAU. As noted in the Response to Submissions, acceptance of an undertaking with a duration of close to 30 years is in and of itself unprecedented, as is acceptance of the type of modular structure that NBN Co has proposed. The ԭ considers that this can deliver NBN Cos desire for certainty over its ability to recover its costs over the term of the SAU, because the terms and conditions in Modules 0 and 2 will be in place for the SAU term. Therefore, the ԭ maintains the view that it is not necessary to make all of the terms and conditions in Modules 0 and 2 a fixed principle to deliver this certainty. For the reasons set out in the Response to Submissions, the ԭ is of the view that in the current context, the only matters in the SAU that should be specified as a fixed principle are those: relating to long-term cost recovery in Module 2 and the content of replacement modules; and where there is limited scope for multiple interpretations such that the term or condition could be implemented or operationalised in a future SAU variation in a manner which does not meet the statutory criteria. NBN Co submits that the additional matters that it has identified meet the conditions specified by the ԭ, that is, they are linked to long-term cost recovery and will not have the future operational and implementation issues discussed in the Response to Submissions. The ԭ does not propose to specify the provisions relating to the expiry date of the SAU, the fixed principles terms and conditions and the maximum regulated price for NBN Offers as fixed principles, because doing so will not provide greater regulatory certainty about NBN Cos future access arrangements in the context of the modular structure and length of the SAU term. Further, specifying these additional matters as fixed principles could lead to uncertainty as to the ԭs ability to ensure that those terms and conditions will promote the long-term interests of end-users and will be reasonable over the term in which they are proposed to be fixed principles. For instance, in the context of assessing a proposed variation to the SAU, if the variation proposes to change the existing terms in Modules 0 and 2 in such a way that, by virtue of the interaction between the terms in Modules 0 and 2 and the fixed principles, the fixed principles would no longer satisfy the statutory criteria after the variation, the ԭ may not be able to reject the variation. This is because such a rejection could be for a reason that concerns the fixed principle. As a result, the ԭ would not be able to ensure that these proposed fixed principles will always promote the long-term interests of end-users and be reasonable in light of NBN Cos future variations to the SAU. Following further consideration, the ԭ is of the view that the provision in Module 2 specifying how the ICRA is to be rolled-forward may be specified as a fixed principle, subject to minor drafting amendments. The ICRA roll-forward is a key part of the long-term cost recovery provisions in the SAU, and plays a similar role to the RAB roll-forward equation (which is proposed to be specified as a fixed principle) in that both represent amounts of revenue that NBN Co is yet to recover. Further, the ԭ considers that the ICRA roll-forward equation will still be reasonable in the context of a future assessment of a new SAU or proposed variation to the SAU. Therefore, the ԭ has amended the relevant clause in the Notice to Vary (clause 2C.5.4) and adopted it has a fixed principle. Specifically, the ԭ has split this clause into two parts, so that the term Unrecovered Cost is not included in the fixed principle. This is because the detailed methodology for rolling forward the ICRA, including the calculation of Unrecovered Cost, involves judgement and discretion which creates scope for multiple interpretations. Only the first part of the clause, which specifies that the ICRA for a financial year will be rolled forward from the ICRA for the previous financial year, without specifying how the revenue shortfall for each financial year is determined, is a fixed principle. In relation to NBN Cos proposed drafting to set out acknowledgements about the ԭs role in assessing SAU variations during the replacement module process, the ԭ considers that this would add an additional layer of interpretation in its future decision-making. The ԭ reiterates its view, also recognised by NBN Co, that it is only able to assess (and make a decision to accept or reject) the variation proposed by NBN Co, and not the existing terms and conditions in Modules 0 and 2 that have been accepted by the ԭ in its initial assessment of the undertaking. That is, whilst the ԭ could decide that an SAU variation does not meet the statutory criteria by virtue of its interaction with a term or condition in Module 0 or 2 (and therefore that the variation should be rejected), the ԭ is unable to reject or amend the terms or conditions in Modules 0 or 2 that have been accepted at the outset, which will be in place for the term of the SAU. Therefore, the ԭ does not consider that it is necessary to adopt NBN Cos suggested drafting amendments. Therefore, in the Notice to Vary, the ԭ has specified the following terms and conditions in Module 2 as a fixed principle term and condition: the Regulatory Asset Base roll-forward equation; the Initial Cost Recovery Account roll-forward equation; the fact that the annual revenue requirements will be calculated using the following building block components a return on capital, depreciation, operating expenditure and tax allowance; and the deemed prudent expenditure categories relating to the Telstra and Optus arrangements. Attachment A: Price re-balancing process Attachment B: ԭ assessment of capital expenditure in Module1 Attachment C: ԭ assessment of operating expenditure in Module 1 Attachment D: NBN Co proposed minor variations In Attachment A of the Response to Submissions, the ԭ listed a set of minor variations suggested by NBN Co in its May submission to the Draft Decision, on which the ԭ was seeking views on whether to adopt in the Notice to Vary. The ԭ has included these minor variations in the Notice to Vary. In its July and September submissions, NBN Co proposed a set of further minor variations and drafting refinements to provide increased clarity as to the intended operation of the SAU, and to ensure that the clauses operate as intended, and as effectively as possible. The ԭ has adopted most of these variations in the Notice to Vary (the more material variations are discussed in the relevant sections of this Explanatory Statement), including those relating to: refinements to various definitions in the Dictionary (section 1 of Attachment C to the Main Body), including for WBA alignment; changes to terminology in Schedule 1A (Implementation of NBN Access Service, Ancillary Services and the Facilities Access Service) and Schedule 2A (Implementation) for WBA alignment; refinements to Schedule 1C (NBN Offers and Other Charges) to more explicitly define the NBN Offers and for WBA alignment; refinements to the type of information NBN Co is required to provide the ԭ per annum in Schedule 1F (Regulatory Information), in particular in relation to the risk free rate and the nominal rate of return, accounting and tax asset lifetimes, capital expenditure in an Expenditure Compliance Report and the first financial year; refinements to the Expenditure Compliance Report in Schedule 1F (Regulatory Information), so that NBN Cos Chief Executive Officer is required to provide their opinion of whether capital and operating expenditure has been prudently incurred, rather than to certify that it has been prudently incurred; and refinements to the definition of Third Party Funded Network Changes and capital contributions, as described in section  REF _Ref366660056 \r \h 6.3.1. Contacts Infocentre: 1300 302 502 Website: www.accc.gov.au Callers who are deaf or have a hearing or speech impairment can contact the ԭ through the National Relay Service, HYPERLINK "http://www.relayservice.com.au"www.relayservice.com.au For other business information, go to HYPERLINK "http://www.business.gov.au"www.business.gov.au Addresses National office 23 Marcus Clarke Street Canberra ACT 2601 GPO Box 3131 Canberra ACT 2601 Tel: (02) 6243 1111 Fax: (02) 6243 1199 New South Wales Level 20 175 Pitt Street Sydney NSW 2000 GPO Box 3648 Sydney NSW 2001 Tel: (02) 9230 9133 Fax: (02) 9223 1092 Victoria Level 35 The Tower 360 Elizabeth Street Melbourne Central Melbourne Vic 3000 GPO Box 520 Melbourne Vic 3001 Tel: (03) 9290 1800 Fax: (03) 9663 3699 Western Australia Third floor East Point Plaza 233 Adelaide Terrace Perth WA 6000 PO Box 6381 East Perth WA 6892 Tel: (08) 9325 0600 Fax: (08) 9325 5976 Queensland Brisbane Level 24 400 George Street Brisbane Qld 4000 PO Box 10048 Adelaide Street Post Office Brisbane Qld 4000 Tel: (07) 3835 4666 Fax: (07) 3832 0372 Townsville Suncorp Plaza Suite 2 Level 9 61-63 Sturt Street Townsville Qld 4810 PO Box 2016 Townsville Qld 4810 Tel: (07) 4729 2666 Fax: (07) 4721 1538 South Australia Level 2 19 Grenfell Street Adelaide SA 5000 GPO Box 922 Adelaide SA 5001 Tel: (08) 8213 3444 Fax: (08) 8410 4155 Northern Territory Level 8 National Mutual Centre 911 Cavenagh St Darwin NT 0800 GPO Box 3056 Darwin NT 0801 Tel: (08) 8946 9666 Tel: (08) 8946 9610 Fax: (08) 8946 9600 Tasmania Level 2 70 Collins Street (Cnr Collins & ArgyleStreets) Hobart Tas 7000 GPO Box 1210 Hobart Tas 7001 Tel: (03) 6215 9333 Fax: (03) 6234 7796 Australian Energy Regulator Level 35 The Tower 360 Elizabeth Street Melbourne Central Melbourne Vic 3000 GPO Box 520 Melbourne Vic 3001 Tel: (03) 9290 1444 Fax: (03) 9290 1457 Email: AERInquiry@aer.gov.au Website: www.aer.gov.au  Competition and Consumer Act 2010, s. 152CBDA(2). (CCA)  Submissions to the Consultation Paper were received from AAPT, the Australian Communications Consumer Action Network (ACCAN), the Australian Communications and Media Authority (ACMA), the Competitive Carriers Coalition (CCC), the Department of Broadband, Communications and the Digital Economy (DBCDE), Herbert Geer (on behalf of iiNet), John de Ridder, Macquarie Telecom, NBN Co, Optus, Telstra and Vodafone Hutchison Australia (VHA).  Submissions to the draft Notice to Vary were received from AAPT, the Competitive Carriers Coalition (CCC), Herbert Geer (on behalf of iiNet), John de Ridder, Macquarie Telecom, NBN Co, Optus and Telstra.  ԭ, Variation of NBN Co SAU response to submissions, July 2013, p. 7. (ԭ Response to Submissions)  Ibid, pp. 7-9.  See Attachment D of this Explanatory Statement.  CCA, s. 152CBDA(2)(b).  CCA, s. 152CBDA(3).  Subsections 152CBDA(3), 152CBD(2)(d), and 152CBD(6) of the CCA require that the ԭ consult on the varied undertaking unless the variations are of a minor nature and are not likely to have a material adverse effect on the legitimate commercial interests of any person.  CCA, s. 152CBC(6)(ac).  Under subsection 152CBC(2) of the CCA, the ԭ must accept or reject the undertaking.  CCA, s. 152CBDA(3).  Explanatory Memorandum to the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010, p. 210. (EM to the CACS Bill)  CCA, s. 152CBDA(2)(a).  CCA, s. 152CBDA(2)(b).  CCA, s. 152CBDA(2).  CCA, s. 152CBC(6).  CCA, s. 152CBDA(3).  CCA, ss. 152CBC(6) and 152CBD(6).  CCA, s. 152CBC(6)(aa).  CCA, s. 152CBC(6)(ac). There is a third possibility, that is, if NBN Co gives the ԭ the varied undertaking, but the changes specified by the Notice to Vary were only minor in nature or unlikely to have a material adverse effect on the legitimate commercial interests of any person. However, this possibility is not relevant to the SAU, given the extent of the changes proposed by the ԭ in its draft notice.  CCA, s. 152CBD(6).  EM to the CACS Bill, p. 210.  The ԭ must accept or reject the undertaking under subsection 152CBC(2) of the CCA.  ԭ Response to Submissions, pp. 15-16.  Telstra, Telstras response to the ԭ draft Notice to Vary NBN Cos SAU [Public version], 26 July 2013, pp. 6-9 (Telstra Submission); Optus, Submission in response to ԭ variation of NBN Co SAU [Public version], July 2013, pp. 6-9. (Optus Submission)  NBN Co, Submission on ԭ draft Notice to Vary NBN Co SAU, 26 July 2013, p. 2 (NBN Co July 2013 Submission); AAPT, Submission to ԭ on draft Notice to Vary the NBN Co SAU, July 2013, pp. 3-4 (AAPT Submission); CCC, Draft Notice to Vary NBN Co SAU CCC submission, 30 July 2013, p. 2 (CCC Submission); Macquarie Telecom, Variation of NBN Co SAU, 30 July 2013, p. 2. (Macquarie Telecom Submission)  Telstra Submission, pp. 7-8; Optus Submission, pp. 7-9.  Telstra Submission, p. 8.  Ibid, pp. 8-9.  Optus Submission, pp. 7-9.  Ibid, p. 9.  ԭ Response to Submissions, p. 18.  Ibid, pp. 15-20.  For example, under sections 152BCQ and 152BDH of the CCA, access seekers have private rights to seek Federal Court orders to enforce compliance with Access Determinations and Binding Rules of Conduct. In addition, under section 152EG, the ԭ or access seekers can seek Federal Court orders about conduct engaged in for the purpose of preventing or hindering the fulfilment of a requirement imposed by an Access Determination or Binding Rules of Conduct.  ԭ Response to Submissions, p. 23.  iiNet, Variation of NBN Co SAU submission by Herbert Geer Lawyers on behalf of iiNet Limited [Public version], 26 July 2013, p. 7. (iiNet Submission)  Ibid, pp. 6-7.  Telstra Submission, p. 9.  Ibid.  ԭ Response to Submissions, p. 23.  NBN Co, Submission to ԭ consultation paper on variation of NBN Co SAU, May 2013, p. 15. (NBN Co May 2013 Submission)  Explanatory Memorandum to the Telecommunications Legislation Amendment Bill 1999; Telecommunications (Universal Service Levy) Amendment Bill 1998; NRS Imposition Amendment Bill 1998, pp. 31-32.  Specifically, clause 1B.2 provides that published SFAAs will expire no later than two years after the date the SFAA commences. This means that all Access Agreements based on these SFAAs will be co-terminus because they will expire at the same time (however, the parties to an SFAA-based Access Agreement may agree to extend the term of that Access Agreement).  ԭ Response to Submissions, p. 22.  NBN Co July 2013 Submission, p. 3. Clause 6 of the Main Body requires NBN Co to publish and maintain SFAAs in relation to the supply of the NBN Access Service, Ancillary Services and the Facilities Access Service for the term of the SAU.  NBN Co, SAU Drafting refinements cover letter, 6 September 2013, p. 1. (NBN Co September 2013 Submission cover letter)  ԭ Response to Submissions, pp. 24-29.  NBN Co July 2013 Submission, p. 4.  Telstra Submission, p. 10.  NBN Co July 2013 Submission, p. 4.  Ibid, pp. 16-17.  Ibid, p. 5.  Telstra Submission, p. 10.  ԭ Response to Submissions, p. 26.  The effects of the length of regulatory cycles on NBN Cos efficiency incentives are discussed in more detail on page 26 of the Response to Submissions.  NBN Co July 2013 Submission, p. 5.  Ibid.  ԭ Response to Submissions, p. 25.  Ibid, p. 36.  NBN Co July 2013 Submission, p. 7.  Ibid.  Ibid, p. 8.  AAPT Submission, p. 5; CCC Submission, p. 2; Macquarie Telecom Submission, pp. 4-5; Telstra Submission, p. 17.  NBN Co July 2013 Submission, pp. 8-9.  Ibid, p. 39.  NBN Co, Special Access Undertaking, 18 December 2012, Schedule 1I, clause 1I.3.1; Schedule 2E, clause 2E.4.1. (NBN Co 18 December 2012 SAU)  Ibid, Schedule 1I, Annexure 1.  Ibid, Schedule 1E, clauses 1E.6.7 to1E.6.11.  Ibid, Schedule 1E, clauses 1E.7.4 and 1E.8.2(b).  Ibid, Schedule 1I, clauses 1I.3.4 and 1I.4(b).  Ibid, Schedule 2E, clause 2E.5.2(b).  NBN Co July 2013 Submission, p. 11.  Ibid, p. 15.  Ibid, p. 16.  Ibid.  Ibid, p. 11.  Ibid.  Optus Submission, pp. 28-29.  Ibid, p. 29.  ԭ Response to Submissions, pp. 43-47.  NBN Co 18 December 2012 SAU, 18 December 2012, Schedule 1I, clause 1I.3.1(c)(iii).  Ibid, Schedule 1I, Annexure 1, clauses 5 and 6.  NBN Co July 2013 Submission, p. 12.  Telstra Submission, p. 19.  Ibid.  Ibid, pp. 19-20.  Ibid, p. 20.  Ibid.  Optus Submission, p. 30.  NBN Co 18 December 2012 SAU, Schedule 1I, clause 1I.1.3(b)(i); Schedule 2E, clause 2E.1.3(b)(i).  NBN Co, Drafting refinements proposed by NBN Co, 6 September 2013, p. 47. (NBN Co September 2013 Submission drafting refinements)  NBN Co July 2013 Submission, p. 50.  Ibid.  NBN Co September 2013 Submission drafting refinements, p. 49.  Ibid.  NBN Co July 2013 Submission, p. 12.  NBN Co September 2013 Submission cover letter, p. 1.  Telstra Submission, Annexure 6.  Ibid, p. 19.  Ibid.  Ibid.  Ibid.  Optus Submission, p. 32.  Ibid.  Ibid.  For example, see NBN Co, NBN Co Wholesale Access Service Product and Pricing Overview for Service Providers, December 2011, Attachment F.  Ibid, Attachment E.  NBN Co September 2013 Submission drafting refinements, p. 47.  NBN Co September 2013 Submission drafting refinements, p. 49.  Telstra Submission, p. 19.  For example, NBN Co, NBN Co Industry Consultation Paper: Proposed Business and Enterprise Fibre Services, 23 December 2011, p. 41.  NBN Co July 2013 Submission, pp. 13-14.  Telstra Submission, Annexure 4.  Optus Submission, p. 34.  CCC Submission, p. 3.  AAPT Submission, p. 8.  iiNet Submission, pp. 7-8.  NBN Co July 2013 Submission, p. 16.  Ibid.  Ibid.  CCC Submission, p. 3.  iiNet Submission, p. 8.  AAPT Submission, pp. 8-9.  Optus Submission, p. 37.  Ibid.  Ibid, p. 36.  NBN Co 18 December 2012 SAU, Schedule 1I, clause 1I.1.3(a); Schedule 2E, clause 2E.1.3(a).  ԭ, Draft Decision on the Special Access Undertaking lodged by NBN Co on 18 December 2012, April 2013, p. 90. (ԭ Draft Decision)  NBN Co July 2013 Submission, pp. 17-18.  Telstra Submission, Annexure 4.  AAPT Submission, p. 8.  Optus Submission, p. 39.  ԭ, Notice to Vary NBN Co SAU, October 2013, Schedule 1C (ԭ Notice to Vary). The ԭ noted in the Response to Submissions that one aspect of the 18December 2012 SAU that made the pricing commitments particularly complex was the Reference Offer"Non-Reference Offer distinction.As noted in section  REF _Ref368901238 \r \h \* MERGEFORMAT 4.2.2 of this Explanatory Statement, the Notice to Vary removes the Reference Offer"Non-Reference Offer distinction. In addition, the Notice to Vary ensures that the pricing commitments which were to attach to the Reference Offers are maintainedfor example, the commitment to fix Maximum Regulated Prices in nominal terms for the NBN Offers that were previously Reference Offers up until 30 June 2017.  Ibid, Schedule 1C, clause 1C.5.1; Schedule 2B, clause 2B.2.2.  Ibid, Schedule 1C, clause 1C.5; Schedule 1G; Schedule 2B, clause 2B.2; Schedule 2E.  NBN Co, Submission on ԭ draft Notice to Vary SAU Variation, 26 July 2013; Schedule 1C, clauses 1C.1.3 and 1C.1.5; Schedule 1E, clauses 1E.1.4 and 1E.2.4; Schedule 2B, clause 2B.1.4; Schedule 2C, clause 2C.1.2. (NBN Co July 2013 Submission SAU Variation)  ԭ, Draft Notice to Vary NBN Co SAU, 4 July 2013, Schedule 1D; Schedule 1H; Schedule 2C; Schedule 2F. (ԭ Draft Notice to Vary)  NBN Co July 2013 Submission, pp. 21-22.  Ibid, p. 20.  ԭ Notice to Vary, Schedule 2C, clause 2C.4.  The issues discussed in this section relate to those discussed in section 5.4.1 of the Draft Decision, section 2.4.1.1 of the Response to Submissions, Schedules 1C and 1D of the draft Notice to Vary and Schedule 1C of the Notice to Vary.  John de Ridder, A final word on CVC pricing, July 2013, p. 1.  ԭ Response to Submissions, pp. 68-69.  iiNet Submission, p. 5.  ԭ Draft Decision, p. 13.  Ibid.  Response to Submissions, p. 69.  iiNet Submission, pp. 4-5.  Ibid, p. 5.  ԭ Draft Decision, p. 13.  Optus Submission, p. 10.  Ibid.  NBN Co 18 December 2012 SAU, Schedule 1C, clause 1C.2.5.  ԭ Draft Notice to Vary, Schedule 1C, clause 1C.2.4.  NBN Co, Price List release 2.6, August 2013, clause 2.1.  Ibid.  NBN Co September 2013 Submission drafting refinements, Schedule 1C, clauses 1C.3(b) and 1C.4(e)(i).  ԭ Notice to Vary, Schedule 1C, clause 1C.2.15.  Ibid, Schedule 1C, clause 1C.3(h).  Ibid, Attachment C (Dictionary).  NBN Co July 2013 Submission SAU Variation, Schedule 1C, clause 1C.4.2; ԭ Draft Notice to Vary, Schedule 1D, clause 1D.3.2.  NBN Co July 2013 Submission SAU Variation, p. 35.  ԭ Notice to Vary, Schedule 1C, clause 1C.4.2.  The issues discussed in this section relate to those discussed in section 5.4.2 of the Draft Decision, section 2.4.1.1 of the Consultation Paper, section 2.4.1.2 of the Response to Submissions, Schedules 1D and 2C of the draft Notice to Vary and Schedules 1C and 2B of the Notice to Vary.  ԭ Notice to Vary, Schedule 1C, clause 1C.5.1; Schedule 2B, clause 2B.2.2.  Ibid.  Ibid.  NBN Co July 2013 Submission, p. 20.  Ibid.  Ibid.  ԭ Response to Submissions, p. 75.  NBN Co July 2013 Submission, p. 19.  ԭ Draft Notice to Vary, Schedule 1H, clause 1H.3.8(b).  ԭ Response to Submissions, p. 73.  NBN Co May 2013 Submission, p. 75. The ԭ has made some minor changes to clarify that it is the impact of the ԭs decision on demand and revenues for and from other Offers that will be taken into account in making its decision, rather than just existing demand and revenues for and from those other Offers.  ԭ Response to Submissions, p. 74.  Ibid.  Ibid.  NBN Co July 2013 Submission, p. 20.  Ibid.  NBN Co July 2013 Submission SAU Variation, Schedule 1C, clause 1C.5.4(d); Schedule 2B, clause 2B.3(d).  iiNet Submission, p. 4.  Ibid.  Telstra Submission, p. 16.  ԭ Notice to Vary, Schedule 1C, clause 1C.5.1(f).  NBN Co 18 December 2012 SAU, Schedule 1C, clause 1C.4.1; Schedule 1D, clause 1D.4.1; Schedule 2C, clause 2C.2.1. It should be noted that Other Charges that are provided on an hourly labour rate or hourly labour rate plus cost of materials basis are instead subject to indexing to the ABS Labour Price Index, and based on costs to NBN Co: Schedule 1D, clause 1D.4.2(d).  ԭ Response to Submissions, p. 59.  ԭ Draft Notice to Vary, Schedule 1H, clause 1H.3.4; Schedule 2F, clause 2F.2.4.  Ibid, Main Body, clause 4.7; Schedule 1H, clause 1H.2.  Ibid, Schedule 1D, clause 1D.4.1(a); Schedule 2C, clause 2C.2.2(a).  Ibid, Schedule 1D, clause 1D.4.1(f); Schedule 2C, clause 2C.2.2(f).  Ibid, Schedule 1H, clause 1H.2.5.  Ibid, Schedule 1H, clause 1H.2.5.  Ibid, Schedule 1H, clause 1H.3.2; Schedule 2F, clause 2F.2.2.  Ibid, Schedule 1H, clause 1H.3.3; Schedule 2F, clause 2F.2.3.  Ibid, Schedule 1H, clause 1H.3.4; Schedule 2F, clause 2F.2.4.  Ibid, Schedule 1H, clause 1H.3.8(a); Schedule 2F, clause 2F.2.8(a).  ԭ Response to Submissions, p. 80.  ԭ Draft Notice to Vary, Schedule 1H, clause 1H.3.8(b); Schedule 2F, clause 2F.2.8(b).  ԭ Response to Submissions, p. 80.  NBN Co May 2013 Submission, p. 75.  ԭ Draft Notice to Vary, Schedule 1H, clauses 1H.3.5 and 1H.3.6; Schedule 2F, clauses 2F.2.5 and 2F.2.6.  Ibid, Schedule 1H, clause 1H.3.7.  Ibid, Schedule 1H, clause 1H.3.  AAPT Submission, pp. 7-8; iiNet Submission, pp. 2-3; Macquarie Telecom Submission, p. 4; Optus Submission, pp. 22-23; Telstra Submission, pp. 14-16.  iiNet Submission, p. 3.  Macquarie Telecom Submission, p. 4.  Ibid.  Telstra Submission, pp. 15-16.  Ibid, p. 14.  Ibid  AAPT Submission, p. 8; CCC Submission, p. 2; Macquarie Telecom Submission, p. 4; Optus Submission, p. 23.  AAPT Submission, p. 7.  Telstra Submission, p. 16.  Ibid  Ibid, pp. 12-13.  Ibid, p. 14.  bid, p. 12.  Ibid, p. 14.  Optus Submission, pp. 10-11.  Ibid, p. 11.  CCC Submission, p. 3.  Macquarie Telecom Submission, p. 5.  AAPT Submission, pp. 5-6.  NBN Co May 2013 Submission, pp. 72-73.  ԭ Notice to Vary, Schedule 1G, clauses 1G.3.1 and 1G.3.7.  Ibid, Schedule 1G, clause 1G.3.1.  Ibid, Schedule 1G, clause 1G.3.7.  Ibid, Schedule 1G, clause 1G.3.7.  In its July 2013 submission, NBN Co proposes an amendment to the draft Notice to Vary that a Price Review Arrangement in Module 2 must be between one and five years long. NBN Co submits that the ԭ did not explain in the Response to Submissions why a Price Review Arrangement in Module 2 should be between three and five years long, while in Module 1 the length could be as short as one year.  ԭ Draft Notice to Vary, Schedule 1H, clause 1H.3.8(a); Schedule 2F, clause 2F.2.8(a).  Ibid, Schedule 1H, clause 1H.3.8(b); Schedule 2F, clause 2F.2.8(b).  NBN Co July 2013 Submission, p. 22.  Ibid. NBN Co proposes that the ԭ must have regard to the objective of minimising the difference in NBN Cos net revenues over the five year period from when the Price Review Arrangement commences  ԭ Notice to Vary, Schedule 1G, clause 1G.3.8(d); Schedule 2E, clause 2E.2.8(d).  Ibid, Schedule 1G, clause 1G.3.8(d); Schedule 2E, clause 2E.2.8(d).  NBN Co July 2013 Submission, p. 22.  Ibid.  Ibid, p. 23.  ԭ Notice to Vary, Schedule 1G, clause 1G.3.8(a); Schedule 2E, clause 2E.2.8(a).  NBN Co July 2013 Submission, p. 23.  Ibid.  ԭ Notice to Vary, Schedule 1G, clauses 1G.3.8(b) and 1G.3.8(c); Schedule 2E, clauses 2E.2.8(b) and 2E.2.8(c).  ԭ Response to Submissions, p. 82.  See clause 4.6(d) of the ԭ Notice to Vary.  NBN Co July 2013 Submission, p. 24.  Ibid.  NBN Co 18 December 2012 SAU, Main Body, Attachment C, clause 1, definition of Relevant Tax, paragraphs (a)(iii) and (iv).  ԭ Notice to Vary, Schedule 1G, clause 1G.2.5(a).  Ibid, Schedule 1G, clause 1G.2.5(b).  ԭ Response to Submissions, pp. 88-89.  NBN Co July 2013 Submission, pp. 24-35.  ԭ Notice to Vary, Schedule 2C, clause 2C.7.7(a).  Ibid, Schedule 2C, clause 2C.6.1(d); clause 4.6(b).  ԭ Response to Submissions, p. 91.  Ibid, p. 92.  Ibid.  Ibid, p. 93.  NBN Co July 2013 Submission, pp. 25-26.  Ibid, p. 25.  Allen Consulting Group, Working Capital Relevance for the Assessment of Reference Tariffs, March 2002, p. 26. (Allen Consulting Group report)  Optus Submission, p. 13.  Allen Consulting Group report, pp. 26-27.  In NBN Cos proposed mid-year model, over time, the mid-year adjustment effectively occurs only at the end of every year. As a result, there is scope for NBN Co to earn excess return (via the larger capital building blocks) throughout the year.  Allen Consulting Group report, pp. 26-27.  NBN Co September 2013 Submission cover letter, p. 2.  NBN Co 18 December 2012 SAU, Schedules 1E and 1F.  Optus Submission, p. 15.  Ibid.  Ibid, p. 19.  ԭ Draft Decision, pp. 135-136 and pp. 141-149; ԭ Response to Submissions, pp. 93-101.  NBN Co July 2013 Submission, p. 26.  Ibid.  Ibid.  NBN Co July 2013 Submission SAU variation, p. 128.  NBN Co 18 December 2012 SAU, Schedule 1E, clause 1E.5.  Ibid, Schedule 1E, clause 1E.4.  Ibid, Schedule 1E, clause 1E.3.2.  ԭ Response to Submissions, pp. 97-100.  NBN Co July 2013 Submission, p. 27.  Ibid.  Optus Submission, p. 18.  NBN Co 18 December 2012 SAU, Schedule 1E, clause 1E.6.2(vi).  Ibid, Schedule 1F, clause 1F.7.1(c)(i).  ԭ Response to Submissions, p. 100.  NBN Co July 2013 Submission, p. 27.  Optus Submission, pp. 17-18.  This process also allows the ԭ to endorse a network change in the event of a dispute between NBN Co and a customer about a proposed network change.  NBN Co July 2013 Submission, p. 28.  Ibid.  ԭ Response to Submissions, pp. 103-106.  NBN Co July 2013 Submission, p. 29.  Ibid; NBN Co July 2013 Submission SAU Variation, pp. 136-139.  Optus Submission, p. 20.  Ibid.  Ibid.  Ibid.  NBN Co 18 December 2012 SAU, Schedule 1F, clause 1F.7.1(c)(i).  ԭ Draft Decision, p. 168.  ԭ, Consultation Paper variation of NBN Co SAU, 4 April 2013, pp. 33-34.  NBN Co July 2013 Submission, pp. 31-33.  Optus Submission, pp. 18-19.  AEMC, Rule Determination National Electricity Amendment (Economic Regulation of Network Service Providers) Rule 2012, 29 November 2012.  Ibid.  NBN Co 18 December 2012 SAU, Schedule 2D, clause 2D.4.3(a).  Ibid, Schedule 1F, clause 1F.4.1(a).  NBN Co, Supporting Submission NBN Co Special Access Undertaking, 28 September 2012, p. 113.  Ibid, p. 132.  NBN Co July 2013 Submission, p. 33.  NBN Co has proposed new provisions which deal with reviewing forecasts if a price rebalancing occurs (this is discussed in section  REF _Ref366663334 \r \h \* MERGEFORMAT 5.1.2 of this Explanatory Statement).  NBN Co July 2013 Submission, p. 33.  Ibid.  Optus Submission, p. 18.  ԭ Draft Notice to Vary, Schedule 1D, clause 1D.2.1(c).  ԭ Response to Submissions, p. 118.  NBN Co July 2013 Submission, p. 31.  ԭ Response to Submissions, pp. 124-125.  Telstra Submission, p. 20.  Ibid.  ԭ Response to Submissions, p. 124.  Telstra Submission, p. 85.  Ibid. See, for example, sections 12 and 13 of the Commercial Arbitration Act 2010 (NSW).  See, for example, NBN Co, Wholesale Broadband Agreement, 9 July 2013, Module G, clause G5.  Telstra Submission, p. 20.  NBN Co July 2013 Submission, pp. 36-37.  ԭ Response to Submissions, pp. 126-129.  NBN Co July 2013 Submission, pp. 38-39.  ԭ Response to Submissions, p. 127.  NBN Co July 2013 Submission, p. 38.  ԭ Response to Submissions, pp. 127-129.  Ibid, p. 129.  NBN Co July 2013 Submission, p. 39.  Telstra Submission, p. 20.  Ibid.  CCA, s. 152CBD(4).  ԭ Response to Submissions, p. 136.  NBN Co July 2013 Submission, pp. 41-42.  Ibid, p. 42.  EM to the CACS Bill, p. 205.  Ibid, p. 182.  CCA, ss. 152CBAA(5) and 152CBAA(6).  ԭ Response to Submissions, p. 136.  Ibid, p. 135.  Ibid, p. 136.  NBN Co July 2013 Submission, pp. 41-42.  Ibid, p. 42.  ԭ Response to Submissions, p. 137.  NBN Co July 2013 Submission, p. 34.  NBN Co September 2013 Submission cover letter, p. 1.  NBN Co July 2013 Submission, p. 1; NBN Co September 2013 Submission cover letter, p. 3.  NBN Co July 2013 Submission, p. 1.  Ibid, pp. 34-55; NBN Co September 2013 Submission cover letter, p. 1.  NBN Co July 2013 Submission, p. 40.  NBN Co September 2013 Submission cover letter, p. 2  Ibid.  NBN Co July 2013 Submission, p. 40.  Ibid.  NBN Co September 2013 Submission cover letter, p. 2.      PAGE \* MERGEFORMAT 94 Variation of NBN Co SAU explanatory statement October 2013 Variation of NBN Co SAU explanatory statement October 2013  PAGE \* MERGEFORMAT 1  PAGE \* MERGEFORMAT 98 Variation of NBN Co SAU explanatory statement October 2013 Variation of NBN Co SAU explanatory statement October 2013  PAGE \* MERGEFORMAT 97  PAGE \* MERGEFORMAT 100 Variation of NBN Co SAU explanatory statement October 2013 Variation of NBN Co SAU explanatory statement October 2013  PAGE \* MERGEFORMAT 99  PAGE \* MERGEFORMAT 2 Xxx reportmonth/year Summary of price review criteria: The rebalanced prices are reasonable (s. 152AH of CCA) Net revenue neutrality is achieved The ԭ has taken into account NBN Cos legitimate business interests and the effect of the rebalance on other offers ԭ initiates a price review Maximum Regulated Prices take effect from start of Financial Year 120 days for NBN Co to respond (or as agreed) NBN Co provides ԭ with Price Review Proposal ԭ applies price review criteria Price Review Arrangement (duration of between 3 to 5 Financial Years) ԭ Determined Price Review Arrangement in accordance with price review criteria Maximum Regulated Prices do not change ԭ accepts or accepts variation ԭ discontinues or rejects and discontinues ԭ makes decision and provides reasons Issues NBN Co with price review notice Issues ԭ with price review notice ԭ requests variation ԭ rejects and does not discontinue NBN Co initiates a price review ԭ satisfied ԭ not satisfied ԭ not satisfied ԭ not satisfied ԭ satisfied ԭ satisfied Capital expenditure belongs to a deemed prudent category Capital expenditure is materially consistent with the Network Design Rules, a permitted variation or an endorsed network change ԭ determines substitute value of capital expenditure ԭ includes the capital expenditure in the RAB ԭ does not include the capital expenditure in the RAB Capital Expenditure was incurred in respect of goods or services procured in an open and competitive market (e.g. a commodity market) NBN Co considers whether the contract should be varied or to enter into a new contract, due to a material variation, change or enhancement to the design, engineering and construction of the Relevant Assets Capital expenditure incurred pursuant to a contract that was entered into: as the result of a competitive tendering and procurement process when there was only one potential supplier on arms length terms in exceptional circumstances or or Capital Expenditure is internal capital expenditure and was incurred in a manner that likely to achieve value for money and the lowest total cost of ownership Operating expenditure belongs to a deemed prudent category ԭ determines substitute value of operating expenditure ԭ satisfied ԭ includes the operating expenditure in the RAB ԭ satisfied ԭ not satisfied Operating Expenditure was incurred in respect of goods or services procured in an open and competitive market (e.g. a commodity market) NBN Co considers whether the contract 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