The Australian Competition and Consumer Commission caused a minor convulsion in the market for Telstra shares yesterday when it released its preliminary views on the group’s structural separation undertakings. That was probably an over-reaction.
The instant fall in the Telstra share price was probably a reaction to the ACCC media release, which contained some quite strong language, including a statement that the undertakings couldn’t be accepted in their current form and that important changes were required.
There was a significant gap between the media release and the subsequent posting of the commission’s full 207-page discussion paper on its website. While it will take time for analysts to work their way through the full paper’s implications, at first glance it isn’t quite as threatening as the media release might have suggested.
Most of the issues are minor and technical, which isn’t surprising given that the undertakings have to hold up for a decade or more until Telstra has effectively shut down its fixed line networks. The ACCC will want to be sure that it hasn’t left any loopholes.
Its major stated concern is, not surprisingly, Telstra’s proposed undertakings relating to the “equivalence” of the prices and terms of the wholesale services it offers its competitors, relative to those it provides its own retail businesses during the period before the networks are shut down.
Those measures, and their transparency, have been the subject of vigorous lobbying by Telstra competitors, which have argued for something closer to the functional separation of Telstra Retail from its other operations.
Telstra, of course, was given a “choice”’ of structural or functional separation by Stephen Conroy (with the functional separation option bracketed with the forced closure/divestiture of its HFC network and a denial of access to future wireless spectrum) and chose, reluctantly, structural separation. The commission noted the minister has said that the requirement for structural separation was not intended to require Telstra to implement functional separation.
It would have come as no surprise to Telstra that the ACCC would want to firm up some of the detail of its undertakings, given that this is its primary opportunity to get the basics of the regulatory settings for Telstra’s progressive withdrawal from fixed line services right.
In fact Telstra’s response to the ACCC paper was more sanguine than the market’s. It said it had been in “productive” discussions with the ACCC for some months, was aware of the issues it would raise and believed they could be resolved in a way that protected shareholder value.
To reinforce that assertion, it also said that, while it hoped to gain ACCC acceptance of the undertakings before its annual meeting on October 18, it would still put the agreements with NBN Co and the government to shareholders for approval (presumably conditional) at that meeting even if it hadn’t. That suggests real confidence the ACCC’s concerns can be addressed.
Telstra wouldn’t need to tell the commission that it needs to be mindful of the implications of trying to impose a form of quasi-function separation on the company because Stephen Conroy has already done that.
When he issued guidance to the commission on the regulatory approach to separation in June, Conroy reminded the commission that under the Telecommunications Act it had to have regard to the national interest in the structural reform of the industry and the impact of the reform on consumers and competition.
That was a gentle way of telling the commission not to blow up the National Broadband Network (and do even more damage to the government) by insisting on arrangements Telstra couldn’t agree to accept.
The independent expert’s report on the deal Telstra struck with NBN Co and the government — the net present value of which is stated to be $11 billion — is due imminently and is expected to provide an endorsement of it, although there will presumably be some conditionality relating to the regulatory uncertainty.
If the deal is put to shareholders before the regulatory issues have been resolved one would expect that Telstra would ask shareholders to give their board the authority to finalise it, or not, depending on whether the resolution of the issues with the ACCC is satisfactory or not.
Given that Telstra does have the ultimate option of walking away in the knowledge that it could take years for the government to impose its sanction of functional separation and the other retributions on it — years the government doesn’t look like having — and that in the meantime the NBN would become a bottomless and permanently black hole for taxpayers’ funds, it is inconceivable that an acceptable set of undertakings won’t be agreed.
*This first appeared on Business Spectator.