Telstra shares fall after ACCC extends copper network regulation

Deputy Head of Research, Gaurav Sodhi speaks to James Fernyhough at the Financial Review. This article was published in The Australian Financial Review on Tuesday, 27 November 2018.

Telstra's share price closed down almost 2 per cent on Monday after the Australian Competition and Consumer Commission revealed it would continue controls on the telco giant's copper network for another five years.

The ACCC's "fixed-line services declaration" determines how much Telstra can charge retailers to use its network, ensuring it does not take advantage of its monopolistic control over the once nationally owned copper network.

Monday's announcement confirmed the regime would continue, although the actual prices will not be decided until next year.

Though expected, investors responded to Monday's announcement by selling Telstra shares, pushing the share price down by more than 2 per cent for most of the afternoon, before a late recovery saw it close down 1.71 per cent at $2.87.

Gaurav Sodhi, deputy head of research at InvestSMART Group's Intelligent Investor, said while the ACCC's decision was a "continuation of the status quo", it was nevertheless a further constraint on Telstra's earnings potential.

"The announcement matters because, as the NBN takes market share, it destroys the economics of the copper network and the regulator will continue to make sure Telstra can't raise prices for customers still relying on that network.

"With the juiciest parts of Telstra – the wholesale business and mobile – both seeing margins squeezed, it's closing the option of raising prices," he said.

Telstra's copper network is increasingly becoming irrelevant as the nationally owned fibre network rolls out. By 2024, when the new regime ends, the NBN's fixed lines are expected to carry internet and phone services to about 92 per cent of the population. For this group there will be no need to regulate access to Telstra's copper network.

However, for the 8 per cent of the population in rural areas who are not connected to the NBN's fixed network, continued regulation of Telstra's copper network may still be necessary.

Despite theoretically putting Telstra at a disadvantage, the telco supported the ACCC's extension along with every other organisation that made submissions to the ACCC. However, sources pointed out the decision on specific prices was yet to come, and that had proved the more controversial decision in the past.

In 2011, when the ACCC demanded Telstra cut wholesale prices by 9.4 per cent, Telstra took the regulator to court.

Telstra has cited the migration to the taxpayer-owned NBN as one of the main factors behind its well-documented struggles, which have seen its share price lose two-thirds of its value since 2015.

In June Telstra announced its T22 business plan, which will see a shift of focus towards mobile and retail, massive cost-cuttings and redundancies, and the creation of a separate infrastructure business division, which many speculate Telstra will turn into a separate entity in order to bid for the NBN itself.

The announcement of the T22 plan prompted the second major sell-off of the year, the first coming a month earlier when the telco issued a profit downgrade. Telstra's loss of its network monopoly has been compounded by the high wholesale price of NBN plans and a sudden surge in competition in the mobile market.