Telco regulatory package tabled

The inevitable occurred yesterday when the federal government's proposed regulatory package was released which includes plans to force Telstra to separate and potentially divest Foxtel.

Minister for Broadband, Communications and the Digital Economy, Senator Stephen Conroy said the bill was tabled in the House of Representatives yesterday and it will be referred off to a Senate committee with an expectation that it will be debated in Parliament in the October/November sessions.

"So we believe that for the triggers and the flexibilities that are inherent in this bill to be activated, those discussions need to be complete by around the end of November, beginning of December. So there is a lot of flexibility here about how we go forward, depending on the choices Telstra makes.

"And I believe that, as I said, Telstra are very constructively engaged in discussions with us already. We are not going to be talking about them publicly. We are acknowledging they're happening so that people understand they are actually happening.

"But neither, I believe, Telstra or myself will be commenting on them as they go along, despite many phone calls from all of you to me and to Telstra, I'm sure now. But we will not be talking about them; we will be engaged in those discussions," said Conroy.

The main tenets of the package include the following points.

Telstra can voluntarily submit an enforceable undertaking to the Australian Competition and Consumer Commission to structurally separate. If Telstra chooses not to structurally separate, the government can impose a strong functional separation framework on Telstra. This is aimed at seeing Telstra conduct its network operations and wholesale functions at arm's length from the rest of Telstra; provide equivalent price and non-price terms to its retail business and non-Telstra wholesale customers; and to ensure equivalence of treatment is made transparent to the regulator and competitors via strong internal governance structures.

Telstra will be prevented from acquiring additional spectrum for wireless broadband while it remains vertically integrated; owns a hybrid fibre coaxial cable network; and maintains its interest in Foxtel.

"The legislation provides scope for the Minister to remove either or both of the second and third requirements in the event that Telstra submits to the ACCC an acceptable undertaking to structurally separate," the government said.

The Australian Competition and Consumer Commission will be given beefed up powers to determine up-front terms and conditions for a three- to five-year period, following consultation with industry; determine principles to apply for longer periods; and make binding rules of conduct to immediately address problems with the supply of regulated wholesale services.

The Universal Service Obligation will also be beefed up. The Minister will be able to specify the standards, terms and conditions of services, connection and repair periods, and reliability requirements of the standard telephone service. Telstra will be required to meet new minimum performance benchmarks. Failure by Telstra to meet the requirements will expose Telstra to a civil penalty of up to $10 million.

The legislation also includes more stringent rules on the removal of payphones and new provisions to allow people concerned about a payphone removal to apply to ACMA to direct Telstra not to remove a payphone. Failure to comply with the new rules will expose Telstra to civil penalties or on-the-spot fines.

"It is Telstra's view that many aspects of this package are unnecessary and need never be implemented if a mutually acceptable outcome can be reached on the National Broadband Network," Ovum's Research Director, David Kennedy, commented.

"The government’s strategy on separation is to make Telstra an offer it cannot refuse. Separate yourself, or have separation done for you.

"However, separation takes time to accomplish, because separation requires IT systems to be redesigned or even duplicated. While the government will seek agreement by year’s end, a separation process might take two years to fully execute.

"Separation has only been accomplished in two other markets, the UK and New Zealand, so global experience is limited. There is no doubt that separation creates a more level playing field and a more dynamic market. However, it also increases static costs, and there are suggestions it reduces investment incentives. It remains to be seen where the long-term balance lies.

"The National Broadband Network is another issue that still needs to be addressed. This package of reforms is an opportunity to articulate a transition strategy to the NBN. This is the perfect time to vend Telstra’s copper access network into the NBNCo, providing an immediate wholesale revenue stream for the NBNCo.

"This would also reconfigure the NBNCo’s task: rather than building an FTTH network from scratch in competition with Telstra, its task would be to upgrade copper to FTTH. This would allow Australia to avoid a lose/lose competitive battle between the NBNCo and Telstra’s copper network," concluded Kennedy.

"Telstra supports the government's NBN vision. We are willing to discuss options around separation," said David Thodey, Telstra's CEO.

Telstra will carefully examine the package over the coming days, he said.

"At all times, our approach to regulatory reform and the NBN will continue to be driven first and foremost by the need to protect the interests of our shareholders.

"Telstra has done a large amount of work to ensure we have the best possible understanding of the complex and challenging issues around separation and NBN.

"We are actively and constructively engaged with government," Thodey said. "Much remains uncertain, but we will continue to provide updates whenever it is appropriate to do so."

Telstra shares fell 14 cents to $3.11 after the announcement.