A regulation resolution for Telstra

Business Spectator

The protracted, tortuous process of clearing the way for the deal between Telstra and NBN Co continues to inch forward. Despite today's announcement of yet another delay, it is on track.

Telstra today lodged a revised structural separation undertaking with the Australian Competition and Consumer Commission, which had expressed some misgivings, albeit not deal-breaking ones, with the original undertakings Telstra proffered.

While the ACCC welcomed the changes Telstra made, particularly in relation to the transparency and equivalence of the prices and terms of the wholesale services it will offer on its fixed line networks to competitors during the decade or so before they are shut down, it also said it had become apparent that there were outstanding regulatory concerns in relation to wholesale ADSL services.

That might suggest there is still something substantial for Telstra to overcome before it can finally lock in the deal with NBN Co that will deliver $11 billion of estimated value in net present value terms (and more likely something significantly greater than that).

In fact it appears those concerns, while they will result in further delay, are related to technical rather than fundamental issues. The legislation the federal government pushed through parliament earlier this year that relates to the structural separation undertakings is apparently inconsistent with the pre-existing competition legislation governing telecommunications.

That has forced the commission to give “urgent” consideration to holding a public inquiry into the declaration of wholesale ADSL, which will push the final decision on Telstra's undertakings out from its scheduled timing of late this month to February.

While the delay will irk Telstra, NBN Co, Stephen Conroy and, perhaps, the ACCC, the inquiry is unlikely to produce a deal-breaker.

Telstra has been supplying wholesale ADSL services to its competitors for about five years. Within its structural separation undertakings there is a specific undertaking in relation to wholesale ADSL and the terms and pricing methodology on which it will continue to be offered.

An ACCC ‘declaration' of the service, therefore, is unlikely to create the kind of material adverse event that would cause Telstra to send the deal back to its shareholders.

In fact, the best indication of how insubstantial a threat to the deal the inquiry is perceived to be came from a statement by ACCC chairman, Rod Sims, that, provided the outstanding concerns around wholesale ADSL could be resolved quickly, the commission was “otherwise minded” to accept the undertakings.

As it happens, while Telstra would like to get the undertakings approved and its lucrative deal with NBN Co locked in, the party most affected by the delay is NBN Co, which is already paying for access to Telstra's infrastructure but can't get access to Telstra's customers until the undertakings have been approved and the deal is formalised. It's paying for something that it can't properly exploit, which doesn't help its already marginal economics.

That the economics of the NBN are marginal was underscored by a report from an arm of the Productivity Commission yesterday which looked at the implications of the NBN under the federal government's competitive neutrality policy and concluded that its targeted rate of return – 7 per cent – was below a commercial rate of return.

That is no revelation. It has been obvious from the moment NBN Co released its business case that the return, even if NBN Co hits all its targets, wouldn't go close to covering its weighted average cost of capital. NBN Co's Mike Quigley has also been very open about the fact that the NBN wouldn't be built by any normal commercial entity.

While Stephen Conroy immediately dismissed renewed calls for a cost-benefit analysis – a recommendation of the report – the findings could have implications for the federal government.

If NBN Co isn't a government business enterprise targeting a commercial rate of return it is arguable that its costs and operating losses – which will run to tens of billions of dollars before it starts producing positive cash flows – ought to be brought into the federal budget. That would blow Wayne Swan's promised surplus apart.

The decision as to whether NBN Co should be on-budget or off-budget is in the hands of some poor person within the Australian Bureau of Statistics. You'd hate to be the person who had to tell Conroy and Swan that the ABS agreed with the Productivity Commission and NBN Co would have to be incorporated into the budget numbers.