Conroy's Telstra stumble

The inadvertent tabling in the Senate of confidential information about Telstra's fixed line network is extremely embarrassing for Stephen Conroy and the Rudd Government but of little real consequence in terms of the negotiations between the parties over Telstra's structural separation and potential sale of assets to NBNCo.

While the Australian Competition and Consumer Commission's analysis of Telstra's copper network – produced as part of the "request for proposals" process under the original, eventually aborted, national broadband network plan – contains various valuations of the copper network, they are quite theoretical and were originally commissioned for a quite different purpose.

The valuations, which range from about $8 billion to just over $40 billion, flow from estimates of historical costs and also from ACCC and Telstra modelling that is used to help determine regulated access prices to Telstra's network.

The values flowing from the modelling are extremely theoretical, based on hypotheses about what a new and extremely efficient network would look like, and are designed to help the ACCC calculate what it calls the total service long run incremental cost of providing services to Telstra's competitors.

The negotiations Telstra is having with the government and NBNCo aren't about historical or theoretical regulatory asset values but are very much about commercial value. From Telstra's perspective it will want to be compensated for the net present values of the future cash flows it will relinquish if it sells infrastructure to NBNCo and becomes purely a retailer of fixed line services.

At this point the parties haven't, apparently, even got to the point where they can talk numbers, but it is a reasonable assumption that when they do the starting point won't be $8 billion or $40 billion, but something well within that range.

The government's $20 billion estimate of the compensation it would have to pay Telstra if it had cut over the copper network as envisaged by the original NBN process – the number that sank that process – sounds like a more sensible starting point, if the entire network were to be acquired by NBNCo, which is unlikely. Goldman Sachs JBWere has estimated that Telstra's ducts and pipes, which NBNCo will probably regard as its priority given the prohibitive cost of duplicating them, are worth about $12 billion.

That's not to say that the tabling of the report, complete with the information that was supposed to be withheld (but was instead highlighted) doesn't create some issues for both sides. The numbers will have some impact on perceptions and expectations.

For the government, if NBNCo ultimately pays something substantially above the bottom of the ACCC's range of estimated values it will be seen to have paid too much. For Telstra, if it doesn't get value close to the number generated by its own modelling – $33 billion – it could face a shareholder backlash and potentially even litigation.

If an agreement is reached, however, it should be possible to explain how the valuation was arrived at in terms of the economic value to Telstra shareholders of the assets sold.

The fact that the information was made public will, however, provide some quiet amusement and a sense of vindication for former Telstra chairman, Donald McGauchie, and former chief executive Sol Trujillo.

While Telstra was kicked out of the request for tenders process on a technicality – it hadn't submitted a small and medium-sized enterprises participation plan – it had infuriated the government by not lodging a complying tender. While it had prepared a 5000-page proposal, it submitted 12 pages.

At the time, it said it was concerned about the potential of the process to lead to further separation of its operations (which will now occur with NBNCo), as well as about the security of the confidentiality arrangements the government had in place and the potential misuse of the data to assist in any structural separation of its business and to damage its shareholders.

Within the 5000-page document were reams of highly detailed and commercially very sensitive information about Telstra's network, which could have been highly valuable to Telstra's competitors and probably its regulator.

The tabling of confidential information that was supposed to be seen only by those with probity clearance for the original NBN process tends to indicate Telstra was right to be concerned and cautious.

The "new" Telstra, however, resisted the opportunity to say 'we told you so', in keeping with its desire to engage with the government and the new NBN process and distance itself from its adversarial recent past, at least until it sees the size of the cheque NBNCo proposes to write and gains some binding commitments from Conroy that cooperation, in return for fair value, will remove the threats of exclusion from future wireless spectrum auctions and/or the loss of its HFC cable and Foxtel interest.