Govt to break up Telstra: All the details

If Telstra does not voluntarily structurally separate, a new telecommunications reform package will permit the government to impose an oppressive functional separation framework on it, the Federal Government announced today.

Stephen Conroy at the ATUG Awards earlier this year
(Credit: Suzanne Tindal/ZDNet.com.au)

"It is the government's clear desire for Telstra to structurally separate, on a voluntary and cooperative basis," Minister for Communications Stephen Conroy said in a statement today, outlining the reform package.

It is the government's clear desire for Telstra to structurally separate, on a voluntary and cooperative basis

Communications Minister Stephen Conroy

Telstra has two choices: voluntarily structurally separate within about 13 weeks, which will leave Telstra as two separate commercial entities; or have the deed done for it under the more mild functional separation regime which would be imposed on it by the government along with stringent reporting requirements and compliance measures.

The telco was also likely going to be forced to divest itself of its share of Foxtel, or else be banned from acquiring spectrum that Telstra has been eyeing to launch 4G wireless services. Telstra has not issued a statement, but has said it was examining the response.

The Bill that would realise Telstra's functional separation alters the Telecommunications Act (1997) so that Telstra must operate its network and wholesale functions "at arm's length" from its retail business.

It would also require Telstra provide equivalent price and non-price terms to its retail business and non-Telstra wholesale customers. Greater operational transparency would be required to aid regulatory oversight by the Australian Competition and Consumer Commission (ACCC).

At a media briefing in Canberra this morning, Conroy said he was confident the proposition would not lead to the government being sued by Telstra shareholders. The outcome, whatever form of separation occurs, will be expected to happen over the coming eight to 13 weeks, said Conroy.

"There will be some very hard-nosed negotiations... We've got Mike Quigley, we've got McKinseys, we've got some seriously well-briefed and understanding telco analysts who are working for NBN Co. And Telstra, well they speak for themselves; they're as hard-nosed as they come," he said. "Telstra will only agree if they see it as a win-win," he said of Telstra's voluntary structural separation.

Conroy said Telstra's decision to separate would benefit Telstra shareholders because the telco's copper access network (CAN) was "collapsing" while maintenance of it was increasingly becoming a financial burden.

Henry Ergas has just been structurally separated from his company

Communications Minister Stephen Conroy

"Every time there is a heavy rain, there is further degradation of Telstra's copper access network. There's incredible maintenance required to maintain this network," he said.

Despite its extensive coverage, Conroy noted that even Telstra has conceded its ADSL broadband footprint only reached around 50 per cent of Australia's population today, largely because of the poor state of Telstra's CAN.

Yesterday NBN Co chief, Quigley, announced five new key executive appointments, who will assist the NBN Co in its negotiations with the telco over the crucial issue of what exactly Telstra will vend into the new network in order to reduce its overall cost.

Conroy reiterated his belief that the government would not need to fork out $43 billion for the NBN. The worst would be $22 billion over eight years, he said, and it would eventually sell a 49 per cent stake.

Conroy took a swipe at the vocal chairman of now bust economist consultancy, Concept Economics. "Henry Ergas has just been structurally separated from his company." Ergas had released a recent cost-benefit analysis which claimed the costs outweighed the benefits by up to $20 billion.

As for the cost consumers would be expected to pay in an NBN world, Conroy referred to ISP Internode's current offer of 100MBps speeds for $100 per month, while Optus' research had indicated a price of $60 per month.

While functional or structural separation regimes will hit Telstra's vertical integration, the Bill was also set to break Telstra's horizontal integration by restricting its ability to acquire all-important spectrum to launch, for example, Long Term Evolution (LTE) or 4G wireless technologies.

Specifically, it will be prevented from acquiring spectrum if it remains vertically integrated, owns a hybrid fibre-coaxial cable network, or if it maintains its interest in Foxtel.

At its recent annual earnings announcement, Telstra chief financial officer, John Stanhope, said the company was seeking spectrum currently tied up by television broadcasters. The government intends to auction the appropriate spectrum by around 2013.

The telecommunications reforms will also target restrictions faced by the ACCC in regulating the sector, which have in the past resulted in court fights between Telstra and others. Broadly speaking, the ACCC's decisions will be binding in terms of rules of conduct to address conflicts over the supply of regulated wholesale services.

Universal Service Obligations, which were designed to ensure ubiquitous equitable access to telecommunication services, have been tweaked temporarily, to allow the Communications Minister to specify the standards, terms and conditions, connection and repaid periods, and reliability requirements of phone services, including pay phones. Failure to comply by Telstra will expose it to fines of up to $10 million.

If pay phones were removed and the decision was objected to by locals, they will be able to request intervention by the Australian Media and Communications Authority (ACMA). ACMA will be able to issue Telstra an on-the-spot fine if it does not comply with an order.

This, however, was set to change once the NBN has been launched. USO levies, paid by carriers to assist fund Telstra's USO requirements, will remain until then.

Telcos with revenues of less than $25 million will benefit from the Bill via its exemption from the Carrier Licence charge and reduced reporting requirements to ACMA. The reason given was that compliance costs more than the fees themselves. Reporting requirements, for example, on the state of a carrier's network will be reduced if performance benchmarks were met.

The government will remove the requirement on Telstra to provide technical assistance to enable customers to achieve 19.2 kilobits per second internet services, as the Australian Broadband Guarantee offers broadband speeds of 512 kilobits per second or higher to Australians who cannot access metro-comparable broadband services.