telstra's fight against regulatory restriction Telstra's fight...

telstra's fight against regulatory restriction Telstra's fight against regulatory restriction
By Stephen Bartolomeusz, The Age
November 19, 2005

THE asterisks loomed ever so large at this week's pivotal release of Sol Trujillo's strategic review. Amid the ambitious, radical and very expensive strategy Trujillo and his team outlined on Tuesday, the asterisks that featured on every page of the presentation on the financial implications of the strategy, delivered by chief financial officer John Stanhope, represented a fundamental caveat.

They directed the audience to a footnote that appeared on every slide in his presentation. It said forward-looking financial information contained in the presentation was subject to "a reasonable regulatory outcome".

Trujillo made it clear that, while much of the restructuring and investment at the core of the strategy would occur regardless of the regulatory context, there was quite a lot that wouldn't occur if Telstra didn't achieve reasonable outcomes on issues such as the structure and pricing for competitors' access to its unbundled local loop (ULL), operational separation and "safe harbours" for new investments.

With Peter Costello telling Trujillo he was wasting his time trying to effect changes to the rules (although, it should be said, the rules in question haven't actually yet been framed) and that he should concentrate on running his business and let governments determine the rules, Tuesday's briefing might appear to have been an irrelevant outline of an unachievable aspiration.

If the Government thinks, however, that Trujillo is clumsily playing politics — that the review was a PR stunt rather than a realistic strategy — it has misjudged its man and the extent to which Telstra's board and management supports the apparently hopeless attempt to reverse the regulatory tide.

The asterisks are revealing. Telstra's plans are radical and risky. It will slash up to 25 per cent of its workforce, close its CDMA network and lift investment over the next five years to a staggering $25 billion to $26 billion. Yet, for all that effort and capital, it hopes to generate revenue growth of at best 2.5 per cent, and profit growth of, at best, 4 per cent by the end of the decade — with "a reasonable regulatory outcome".

That says something chilling about its view of its prospects if it faces tougher regulation. It should also warn the Government that Telstra isn't engaging in simple "political lobbying", as Costello charged yesterday. Telstra is serious about resisting the attempts to regulate it more intrusively and to improve the access terms given to its competitors at its expense — because it believes the consequences of the status quo would be devastating for the company and its 1.6 million shareholders.

The Stanhope presentation showed earnings tumbling at compound double-digit rates over the next five years if nothing changes. It was sobering.

If the Government does as expected and toughens the operational separation regime, if it maintains support for a de-averaged pricing structure for access to the ULL while retaining its policy of pricing parity, or averaged retail prices across the nation, if the Australian Competition and Consumer Commission lowers the price of ULL access and if the Government doesn't guarantee "safe harbour" for new networks, Telstra can be expected to become more aggressive, not less.

It is probable Telstra will challenge any regulatory decision in the courts and inevitable that, if it does take action, it will follow up concerns expressed by its chairman, Donald McGauchie, this month in a letter to the ACCC's Graeme Samuel, alleging the ACCC is biased.

It is probable that the Telstra board will either refuse to sign the prospects for T3 or insist it is emblazoned with scary financial health warnings of the impact of regulation. There is bitterness within Telstra that the T2 prospectus, while it referred to the prospect of adverse regulatory change, conveyed an impression it would be subject to less regulation in future.

It is also possible that, if the Government remains unmoved, Telstra will ignite competition in its regulated markets. While that would be costly — it would have to lower wholesale prices and crunch its margins — Telstra has a far greater capacity to fund a price war than any of its rivals. It could damage its competitors and emerge with much stronger market positions.

Telstra's new-found willingness to be aggressive shouldn't be underestimated. The new management and remade board understand that the current access pricing loop of ever-decreasing prices to transfer profits from its shareholders to its access-hooked rivals — coupled with a declining capacity to fund the metro/rural cross-subsidy to maintain pricing parity as mobile-for-fixed line substitution accelerates and free voice calls loom — is a recipe for disaster.

Politicians and regulators may chastise them, while competitors will lobby fiercely to protect their ability to profit from its infrastructure, including networks not yet built. Amid this the Telstra team will make themselves unpopular. That they aren't deterred signals the depth of their concerns.