Telstra stands firmly opposed to "unjust" split

Rejects the Government's regulatory reform bill.

Telstra will not cooperate with Federal Government efforts to split the company, describing Senator Conroy's regulatory reform legislation as "unjust".

In a late response to a Senate Inquiry into the Telecommunications Legislation Amendment Bill 2009, Telstra said it will refuse to structurally separate "while ever proposals fail to give fair value to shareholders".

In sum, Telstra has argued:

• That Telstra's 63 percent share of the market does not equate to market "dominance".
• That the "unjust" threat of being denied access to future mobile spectrum will reduce mobile competition, deny Telstra customers an upgrade path and reduce the amount of finance the Government can raise from spectrum auctions.
• That there is little incentive for Telstra to structurally separate while ever Senator Conroy still has the capacity to deny it mobile spectrum.
• That any regulatory reform legislation should be delayed until after the Federal Government's NBN Implementation Study is complete, giving the company more time to negotiate its position with the Government.
• That the most likely buyers of Telstra's stake in Foxtel would be News Corp and Consolidated Media Holdings, reducing competition in the media sector.
• That the regulator reform bill allows the ACCC to wield power in an unaccountable fashion.

On structural separation

Telstra argued that the Government should delete Section 33 of the proposed changes to the Telecommunications Act, in which it was threatened with exclusion from future mobile spectrum auctions unless it structurally separated or sold off its investments in its HFC cable network and Foxtel.

Telstra argued that the Government has given it no guarantees around access to mobile spectrum should it choose to structurally separate, which subsequently gives it little incentive to cooperate.

"There is no certainty that - if Telstra submits a structural separation undertaking, the ACCC accepts that undertaking and Telstra then implements that undertaking - Telstra will be allowed to bid for LTE/4G spectrum," the submission said. "The Minister retains the power to exclude Telstra from LTE spectrum when it becomes available."

On functional separation

Telstra made a veiled threat to refuse to take part in the NBN process should functional separation be forced upon it.

"One outcome is certain, functional separation will, for many years, divert Telstra management and resources away from migration to the NBN," the submission said.

Telstra used the example of British Telecom's functional separation - which took nine years to complete - to argue against this option.

Functional separation "doubles the risk of customer service and billing problems, and, with millions of lines involved, doubles the potential for service chaos," the carrier said.

Most delays, Telstra added, would be due to "the requirement to re-engineer and/or duplicate IT systems".

On being denied mobile spectrum

Telstra warned that exclusion from mobile spectrum for 4G/LTE services would create "a potential 4G duopoly between Singtel Optus and Vodafone Hutchison Australia".

The carrier argued that Australia enjoys a competitive mobile network market, as proven by the ACCC's approval of the Vodafone/3 merger.

On forced divestments

Telstra said its shareholders had "invested significant sums" in its Foxtel and HFC cable assets.

"To require them to divest their interests in these assets just as they are becoming profitable is unjust and raises questions of sovereign risk," the submission said.

Telstra also warned that any sell down in its interests in Foxtel would likely result in News Ltd and Consolidated Media Holdings stepping in to take its place, reducing competition in the media sector.

Further, Telstra said any concerns about a lack of competition in the HFC cable market was bunk.

"The competition arguments for the divestiture of the HFC network have always foundered on the simple fact that there is an alternative network - the Optus HFC cable - in place," the submission said. "The imminent arrival of the NBN surely suggests that changing the ownership structure of the Telstra HFC will in no way affect the competitive dynamics on the ground."

On new ACCC powers

Telstra argued that the legislation affords competition watchdog the ACCC (Australian Consumer and Competition Commission) greater powers without the required amount of accountability with it.

"This Bill is highly unusual in that it gives the regulator significant powers without setting out very careful prescriptions on how those powers should be used," the submission said.

Proposed changes

While standing firm on structural separation, divesture of assets and threats to deny it access to mobile spectrum, Telstra was careful to leave the door open to further negotiation.

"I want to stress that while Telstra continues to support the Government's vision for the NBN, we believe the Bill to be unnecessary," Telstra CEO David Thodey said in a statement to the ASX.

"Telstra continues to negotiate with the Government in a positive and constructive manner on the NBN," he said.

The carrier also included its own proposed changes to the regulation reform bill in its submission.

Of particular interest are Telstra's proposed changes related to functional separation - which implies that the company is not prepared to take any voluntary action to separate or divest, leaving it to the Federal Government to decide whether to enforce functional separation upon it.

Telstra asked that the functional separation section be amended to included the following principles:

• that functional separation must not be unduly burdensome on Telstra;
• that functional separation must not degrade retail or wholesale service quality;
• that functional separation must not impede Telstra's ability to compete on a fair and efficient basis;
• that Telstra is not required to physically separate information systems or networks and that the retail business unit and network/wholesale business units may utilise common customer agnostic information and network operations systems directly through equivalent interfaces;
• that Telstra may establish internal non-customer facing network units which can provide insourcing of services on an arm's length basis to the functionally separate retail business unit and the network/wholesale business unit; and
• that Telstra may continue to use across the company, on an arm's length basis, support services such as human resources, legal, technology and network planning.