Telstra And The ACCC Price Cuts

This story features TELSTRA GROUP LIMITED. For more info SHARE ANALYSIS: TLS

By Greg Peel

The story so far…

Last December legislation was passed to install the Australian Competition & Consumer Commission as the body responsible for setting telecommunications access prices in Australia ahead of the move to a National Broadband Network. In September the ACCC issued a preemptive draft pricing schedule and sought industry feedback. On Friday the ACCC issued in response its Interim Access Determination and a final version is due late this year. Whatever the final schedule, pricing will apply retrospectively for all of 2011.

Amongst a wealth of complex and confusing prices and measurements, the important factors are the wholesale line rental price, the value ascribed to Telstra's ((TLS)) legacy copper network ahead of a sale into the NBN, and the pricing of ULL bands. The “unbundled local loop” refers to third party telcos renting the copper lines from exchange-to-premises and then providing customers with full service on those lines.

The draft ACCC paper had the wholesale line rental falling to $20.00 from $25.57, but after adjusting its valuation for the copper network on Telstra's encouragement the ACCC has come back with $22.10.

The ACCC has agreed to Telstra's insistence that valuation of cables and ducting should also include a value for the land occupied which is adjusted for inflation. The September draft put the figure at $13.3bn, Telstra came back with a value of $28.2bn, and the ACCC has now settled on $17.5bn.

It seems like Telstra is still missing out by a margin here but given the company's future under an NBN is very dependent on just what the NBNCo pays for Telstra's legacy infrastructure, it would stand to reason Telstra would come in high.

Without going into too much detail on ULL, suffice to say there are four bands and previously each band came with a different price. The ACCC has now averaged out bands in between and cutting a long story short, the net result is a fall in the average price to $19.17 from $28.50 with the majority of services paying $16.00. As this represents an unchanged price for most, the impact here is minimal.

To round out the changes, line sharing service charges have dropped to $1.80 from $2.50 and local call costs to 9.1c from 17c, up from 7c in the draft schedule.

So what does it all mean?

Well on the assumption the NBN continues to roll out as planned, we are now in a transition phase. The beast that is Telstra has always been a failed attempt to marry private investment with public price-setting that satisfied both shareholders and customers alike. That's a bit like asking the north pole of one magnet and the south pole of the other if they would please stick together. The failure will finally be behind us if and when Telstra sells its infrastructure into the NBN and becomes a telco competitor on an even playing field with other providers. But Telstra shareholders still need to vote on the sale and its price in a couple of months and no one can be certain what might happen in Canberra in either the short or longer terms.

But taking this latest ACCC price schedule as a given, and analysts do not expect the final determination to look much different, the bottom line is an earnings reduction for Telstra of around 1-3% just on the pricing. But because we are talking wholesale prices, the end result comes down to how Telstra and its competitors respond. Do they keep charging the same retail prices and hence increase their margin over wholesale prices or do they play the competition card by dropping retail prices by some or all of the amount?

This is not yet clear.

What is clear is that Telstra will only find itself a small loser, and, as Macquarie notes, that the new prices are in line with what the market has been expecting. So the share price impact should be minimal. Potentially the big winner on the new prices is iiNet ((IIN)).

Analysts agree that iiNet should be able to hold on to most of the drop in wholesale cost rather than having to pass it on to retail customers, which translates into something in the order of a 20% increase in earnings. The benefits won't be felt until October however (despite retrospectivity) given that is when iiNet's current pricing contracts elapse.

Yet while the earnings and valuation impact to Telstra may not be significant, BA-Merrill Lynch points out that the change to the structure of ULL pricing could open regional areas to ULL competition. Hence as we await the NBN rollout there is a chance more customers will take up ULL options which puts downward pressure on Telstra's average revenue per unit (ARPU) and implies loss of market share. A flipside winner here could be TPG Telecom ((TPM)).

Deutsche Bank also notes the determination also has the potential to cause further price disruption in the fixed voice market, which would then impact on Telstra's retail fixed line ARPUs.

So the bottom line is: no great shock from the new prices; Telstra's valuation is not greatly impacted at this stage; iiNet stands to be a big winner; Telstra may yet suffer a flow-on to reduced ARPUs.

All of the above depends on how all the players react and how they readjust their individual retail prices to best cope with/benefit from the lower wholesale prices. In other words, stay tuned.

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