Worst case regulation to cost Telstra $1.6 billion

Telstra chief financial officer John Stanhope has warned shareholders the impact of the Federal Government's NBN-focused regulatory review could cost the carrier up to $1 billion upfront and up to $100 million a year for six years.

At Telstra's annual results release this week, Stanhope spoke of the considerable risk the carrier faces, depending on what level of intervention in the regulatory environment the Government chooses to take.

Stanhope said that the preferred model suggested by Telstra in its submission to the regulatory review (No. 2 in the graphic below) would replace ACCC with a new 'adjudicator' with the same degree of operational separation that exists today. This, the graph suggests, could even be earnings positive for Telstra and only take six months to implement.

The introduction of internal contracts between Telstra business units (No.3 on the graph below) would have a negligible impact on earnings, but would distract Telstra for nine months.

Stanhope said that a "light touch" version of functional separation, similar to what was imposed upon Telecom New Zealand, would cost four cents per share to Telstra shareholders and take up to a year.

Stanhope warned a more strict form of functional separation would involve severe consequences for the carrier.

"It would require an unwinding of our IT transformation," he warned.

The IT transformation, which consolidates many hundreds of IT and network systems across the company, has taken four years to date.

Stanhope said at worse, a BT-style form of functional separation would cost Telstra between $800 million to $1 billion initially, plus $50 million to $100 million annually for the "next five to six years."

"The more extreme separation would be enticing for our competitors - but it could take five years or more to implement," Stanhope said. "It would be a major disruption in us serving our customers."

Stanhope also suggested that distracting Telstra with new regulations would only hamper its capacity to provide productive input into the national broadband network.

"Any changes or remedies to the current [approach] must assist and not impede the NBN," he said.