Telstra strikes $11 billion deal with Government on National Broadband Network

Telco giant Telstra has finally struck a deal with the Government over the National Broadband Network, agreeing to shut down parts of its copper-based networks and move customers to the NBN in exchange for $11 billion in compensation.

But the Coalition has continued to threaten undoing the deal if it wins Government in the next federal election, also promising to fulfil its plans to scrap the NBN project entirely.

Telstra shares have risen over 5% to $3.40 after the deal was announced, as investors welcomed the end to a prolonged period of uncertainty regarding the company’s future.

But the deal marks a significant turning point, as Telstra’s focus will undoubtedly now be on retail products instead of balancing a retail offering with maintaining its valuable network infrastructure.

The deal comes after months of debate and controversy between Telstra and the Government, but ultimately removes the need for a dicey legislative battle with the aim of forcible separating Telstra’s retail and wholesale networks.

It also means the NBN can be built cheaper, and faster, than Government estimates have suggested. A further 10 million customers will also be moved onto the NBN from Telstra’s own networks.

As announced by communications minister Stephen Conroy last night, the $11 billion deal will see the NBN use parts of Telstra’s own networks, including pits, ducts and backhaul fibre, to reduce “infrastructure duplication”.

Additionally, Telstra will migrate customers from its copper and pay-TV cable networks to the new NBN network.

The Government said the deal will make the NBN even cheaper, and means a large proportion of infrastructure can be held underground, instead of overhead cabling along existing power lines.

The first $4.5 billion for transferring Telstra customers on to the NBN will be payable over the next eight years, while a further $4.5 billion will be given as rental payments for Telstra’s existing infrastructure.

A further $2 billion will also be provided as compensation for separating the company’s networks.

The payments will come as a much-needed source of revenue for Telstra, as its copper networks begin to age.

But a crucial part of the deal is the provision that Telstra will still be able to bid on the upcoming next generation wireless spectrum. The Government previously said it would exclude Telstra from the bids if a structural separation agreement wasn’t reached.

Telstra chair Catherine Livingstone said in a statement she had received written word from Prime Minister Kevin Rudd that Telstra will be able to bid for the spectrum, and the company itself will receive certainty on a number of regulatory matters.

“This agreement reflects a commitment by all parties to reach a mutually beneficial outcome for Telstra investors, customers, employees and the industry,” she said.

The deal will also see a new company set up called USO Co, in order to take over Telstra’s universal service obligations if the deal is approved. It will assume responsibility for the delivery of standard telephone services, payphones and emergency call handling from July 1, 2012.

It would receive funding of $50 million in 2012-13 and 2013-14, with the remaining funding being contributed by industry.

A further $100 million will be given to Telstra to retrain and redeploy Telstra staff who will “be affected by this very significant reform to the structure of the telecommunications industry”.

Additionally, the Government will require NBN Co to be the wholesale supplier of last resort for fibre connections in Greenfield developments from January 1, 2011.

But while the deal should prove beneficial to both parties, chief executive David Thodey said shareholders still need to submit their approval and the competition regulator also needs to weigh in.

“We’re very encouraged by the heads of agreement, but there is a great deal of work to do to achieve the definitive agreements,” Livingstone said in a statement. A shareholder vote is expected in early 2011.

NBN Co chief executive Mike Quigley said in a statement Telstra is likely to become the NBN’s biggest customer, “as it progressively migrates its voice and broadband traffic to NBN Co’s wholesale-only, open-access network”.

“[The deal] maximises the use of existing infrastructure, it avoids infrastructure duplication, in accelerates the rollout of the NBN and, most importantly, Telstra is likely to become NBN Co’s largest customer.”

But the Coalition isn’t happy. Opposition communications spokesperson Tony Smith said in a statement the fact there is more work to be done indicates the NBN process will be prolonged for months, even years.

“It is clear that if any agreement is to be reached it will not be finalised for many months, well after the federal election,” Smith said.

“Clearly because the Coalition does not support Labor’s reckless NBN we would not proceed with this arrangement if elected.”

However, there are signs the telco industry will support the move. iiNet managing director Michael Malone said in a statement he believed the NBN “would be better served by having Telstra involved rather than not”.