Telstra's separation shuffle

Telstra has released its draft structural separation undertaking (SSU), which sets out how it will provide wholesale services to its competitors on an equivalent basis in the future. While the 168-page document is still waiting for a final approval from the Australian Competition and Consumer Commission (ACCC), this is a second draft into which the regulator has provided considerable input. The regulator has already indicated that it is “minded to accept the undertaking” subject to the regulation of wholesale DSL services.

“Structural separation” is a bit of a misnomer as Telstra Retail will not be required to purchase network capacity from the Wholesale or Network business units. Instead, an equivalence regime has been proposed to prevent Telstra from exploiting its vertical integration at the expense of its competitors. The issue of equivalence was a major bone of contention for the ACCC but the telco's revised undertaking seemingly ticks a lot of the boxes.

The only outstanding issue is the status of wholesale DSL. While wholesale DSL is currently unregulated in Australia, layer 2 wholesale DSL has been made subject to the SSU. However, this is not enough for the regulator, which announced that it would move to declare wholesale DSL as a regulated service.

While there are currently few details available, we believe that wholesale DSL regulation will be imposed outside of the footprint of the DSLAM networks of Telstra's competitors. Certainly, it would require extraordinary evidence to justify regulating wholesale DSL in geographical markets where unconditioned local loop service-based DSLAM operators were in open competition.

We expect Telstra to accept this change, albeit without enthusiasm, as the price of finalising the SSU.

Equivalence, not separation

The SSU does not implement true separation, and was never intended to. In the long run, full structural separation will be a consequence of the rollout of the wholesale-only NBN and the decommissioning of Australia's copper and cable networks. The NBN will effectively be a statutory monopoly in the last mile once the network is complete.

In the interim, Telstra has agreed to implement the SSU. The most important provisions of which are:

1. An overarching equivalence commitment is adopted, which will allow the adjustment of specific equivalence commitments in the SSU to meet future circumstances. However, this must not affect Telstra's customer migration plans or its residual universal service obligation. The ACCC can still determine wholesale prices under its price-setting powers, and these will be incorporated into the SSU.        
2. Separate business units will be maintained for Retail, Wholesale, and Network activities on the fixed network. Executives with line management responsibility for a Retail unit will not be able to have line management responsibilities for a Wholesale or Network unit, and vice versa. The only exceptions will be Telstra's CEO and COO (and any other person the regulator agrees to).                                 
3. Price equivalence will be monitored and enforced. In particular, reporting of internal pricing for regulated services and certain bundles (calculated from financial data) will be measured against reference prices on the Telstra wholesale rate card.                                          
4. Compliance (including whistleblower provisions) and dispute resolution mechanisms will be implemented. These will cover service quality reporting, and a range of wholesale service performance metrics will be monitored on a quarterly basis to ensure equivalence of service quality.

Will it work?

The intent of the SSU is to assure Telstra's competitors that they are receiving wholesale services on an equivalent basis to Telstra Retail. Nevertheless, there will always be arguments about the reality of equivalence. For example, the estimation of Telstra's internal pricing will be fertile ground for dispute.

However, the SSU is certainly an improvement to the transparency of wholesale arrangements in the Australian market, and Ovum thinks that this will help to dispel the atmosphere of suspicion that has hampered the development of the wholesale market.

We doubt that Telstra's competitors will be fully satisfied until its copper and cable networks have been shut down. By then, NBN Co will have adopted the mantle of industry whipping boy from Telstra. If industry complaints about NBN Co's Special Access Undertaking are any indication, that time may come sooner than many expected.

 David Kennedy is a research director and chief telco analyst at Ovum. Read all of his posts here.