No simple solution for Sims

Business Spectator

The market may have gotten overly excited about the implications of the Australian Competition and Consumer Commission's release of its initial response to Telstra's structural separation undertakings and migration plan yesterday, but the commission's stance on Telstra's undertakings could be a preview of something more substantial to come.

The market for Telstra shares recovered somewhat today as the market realised it had over-reacted and that at this point there is nothing in the issues the ACCC has with Telstra's proposals that necessarily constitutes a deal-breaker – and nothing that Telstra regards as an insurmountable obstacle.

If the commission has significant reservations about the Telstra undertakings, however, NBN Co, which is formulating its own set of access undertakings to put to the regulator, is going to get even more aggressive attention.

With Telstra, the commission's key concern is about how it behaves towards its competitors in the decade or so between now and when it decommissions its last copper line, leaving NBN Co with a fixed line infrastructure monopoly. That's why the core of the discussions between Telstra and the ACCC have been on how to ensure the competitors receive equivalent prices and terms from Telstra to those awarded to Telstra Retail.

Apart from the layers and layers of existing regulation of Telstra's fixed line network and the access it has to give its competitors, the new undertakings and the proposed orderly exit of Telstra from the sector, there is some infrastructure-based competition – the Optus HFC cable, hordes of DSLAMs and a lot of both operating and dark fibre – to provide some competitive disciplines.

With NBN Co, the commission knows that not only does it have to create a new set of regulations and endorse a new set of undertakings from NBN Co that will potentially have to survive three decades or more, but it has to do so in the knowledge that the NBN will be a complete monopoly, with Telstra and Optus's HFC networks effectively locked out of telecommunications services and the DSLAMs headed for the scrap-heap when the copper lines are pulled out.

With NBN Co already floating a proposal in a recent discussion paper, under which it would seek approval to raise prices by CPI-plus-five per cent for all high speed services beyond its entry-level 12 Mbps product, where prices would be capped for five years, the question of what kind of regulatory regime the ACCC insists on has taken on extra significance.

It may be true that the loss of competitive infrastructure envisaged and 'encouraged' by Stephen Conroy will be offset by the efficiency gains in building the NBN as a wholesale monopoly – but only if the efficiency gains which that status ought to generate, in what is a natural monopoly, flow back to consumers. The concept of increasing telecommunications prices over time is alien to a sector where they have steadily reduced over what is now a long time.

It doesn't appear that Telstra's deal with NBN Co – the deal worth $11 billion in net present value terms that it struck with NBN Co and the government earlier this year – is contingent on NBN Co's plan for migrating the sector to the NBN being endorsed by the ACCC, which is presumably why Telstra is considering putting the deal to shareholders at the annual meeting in October even if it doesn't have a final ACCC approval for its undertakings.

If the ACCC were to have issues with the plan, and take its time negotiating an acceptable outcome with NBN Co, however, it could still have implications for Telstra. A significant proportion of the $5 billion (NPV) Telstra will receive for selling access to its infrastructure will be generated in the first two or three years of the agreement, while the $4 billion (NPV) of disconnection payments will steadily ramp up.

If there are delays in the roll-out of the NBN there will be delays in the flow of cash from NBN Co to Telstra, which would have an impact on their value if the delays were material.

In dealing with Telstra, the ACCC would be mindful that Telstra has an option other than co-operating with the NBN – it can walk away, accept (while fighting on and hoping for an election) forced functional separation and slug it out with NBN Co, which would be disastrous for NBN Co and the government. It is inconceivable that the commission would try to push Telstra so hard on the undertakings that it would risk a Telstra shareholder rejection of the deal.

NBN Co doesn't have that option. It has to build the network regardless of whatever conditions the ACCC imposes on it, in the knowledge that it will potentially have to live with them for decades.

Thus the circumstances – the fact that the NBN will be around in perpetuity (if it is built) and that the initial regulatory context is critical to both the ACCC and NBN Co – aren't quite as conducive to an easy or quick resolution as appears to be the case with Telstra's relationship with the commission.

Mind you, with Stephen Conroy and the government very conscious that their nation-building monument will be torn down if the Coalition win the next election unless there is too much taxpayer money sunk into it to halt it at that point, there is going to be a lot of pressure on both the ACCC and NBN Co to just get on with building the network even if there are a few I's un-dotted or T's uncrossed.