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Telstra is set for its biggest shake-up since privatisation under Federal Government plans that will pave the way for a break-up of the telco and introduce new hard-line consumer safeguards.

Communications Minister Senator Stephen Conroy this morning announced the company would need to structurally separate voluntarily - and if not the Government would force a split under a new regulatory regime.

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The changes are part of an attempt by the Government to pressure Telstra to be a part of the $43 billion national broadband network, but no promise of involvement has been extracted from Telstra as part of negotiations. In early trade, Telstra shares were down as much as 14 cents, or 4.3 per cent, to $3.11.

Telstra operates as a Universal Service Obligation, which outlines the company's obligations to consumers, including reasonable access to standard telephone services and payphones.

If the proposed changes are adopted, the minister will have the power to ''specify the standards, terms and conditions of services, connection and repair periods, and reliability requirements of the standard telephone service''.
 
If Telstra opts to ignore the demand, the Government will have to power to force Telstra to: - conduct its network operations and wholesale functions at arm's length from the rest of the company; - provide the same price for its retail business and it does for other carriers in accessing its wholesale network; - implement governance structures to make the separation transparent.

Australia's largest telco will also need to choose between holding on to some of its existing assets and gaining access to spectrum space that will allow it to provide so-called 4G services. The draft laws will require Telstra to lose its cable network and divest its interests in the pay television arm, Foxtel.

Telstra will be prevented from acquiring additional spectrum for advanced mobile services. It will be prevented from gaining new spectrum while it remains vertically integrated, owns a hybrid fibre coaxial cable network and holds onto its interest in pay TV operator Foxtel.

But as an incentive to Telstra to co-operate, the legislation gives the minister the right to ditch the last two requirements if the structural separation wins the approval of the Australian Consumer and Competition Commission.

New benchmarks

Under the proposals, Telstra will be subject to tough new guidelines under the threat of hefty penalties. ''Telstra will be required to meet new minimum performance benchmarks. Failure by Telstra to meet the requirements will expose Telstra to a civil penalty of up to $10 million.'' '

'The legislation also includes more stringent rules on the removal of payphones... Failure to comply with the new rules will expose Telstra to civil penalties or on-the-spot fines.'' "For years industry has been calling for fundamental and historic micro-economic reform in telecommunications," he said.

"Today we are delivering this outcome in Australia's long-term national interest." The reforms would address the structure of the telecommunications market and provide Telstra with the flexibility to choose its future path. "It is the Government's clear desire for Telstra to structurally separate, on a voluntary and cooperative basis," Senator Conroy said.

"The Government believes it is possible to achieve a win-win outcome in the interests of Telstra, its shareholders and, more broadly, all Australians." Telstra was one of the most highly integrated telecommunications companies in the world across the fixed-line copper, cable and mobile platforms, Senator Conroy said.

'Long-standing inadequacies'

''These fundamental reforms address the long-standing inadequacies of the existing telecommunications regulatory regime. They will drive lower prices, better quality and more innovative services,'' Senator Conroy said.

''Unless it structurally separates, divests its ... cable network and divests its interests in Foxtel,'' Senator Conroy said. Previous governments had failed to undertake serious reforms of the telecommunications sector, Senator Conroy said.

''The measures in this legislation will finally correct the mistakes of the past,'' he said. In a statement to the market this morning, Telstra said it was ''examining the detail of the reforms and will provide an update to the market as appropriate.''