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Telstra, Australia’s dominant telecommunications company, on Monday suffered a major regulatory setback that will erode earnings and could prompt a cut in the dividend.

Australia’s competition regulator ruled that Telstra should only be allowed to charge one of its competitors A$17.70 a month for access to its copper-wire network, compared with the A$22 Telstra is currently charging and the A$30 that it had argued for.

The prospect of lower access fees sent Telstra’s share price down 2.4 per cent on Monday to A$3.67. Telstra has lost almost a quarter of its market value over the past year, undermining the government’s plan to sell its remaining 51.8 per cent stake in the company.

Last week, Telstra predicted that revenue would rise between 2 and 2.5 per cent in fiscal 2007 while underlying earnings before interest and tax would likely be flat to 2 per cent lower.

However, that forecast was based on an anticipated access fee of A$22 and the company said on Monday that, following the adverse ruling, it “will assess the impact on its business and review its market guidance”.

While analysts expect the ruling to reduce the earnings forecast, Telstra’s existing 1.6m individual shareholders, many of whom invested in Telstra largely because of its high and steady dividend payout, are increasingly fretting over a possible cut in the annual dividend, now 28 cents a share.

Last week, Telstra refused to say whether it would maintain the dividend at its current level and Sol Trujillo, chief executive, indicated the dividend policy could hinge on the outcome of Telstra’s regulatory battle.

The regulatory conflict and the uncertainty over the dividend have added to the government’s difficulties in deciding whether to proceed with a full divestment.

A decision is expected before the end of the month but most analysts and bankers now expect the government to shy away from a retail sale, given the dividend worries and the nosedive in the share price.

Instead, the stake could be tranferred to a national investment fund, with only a small portion of it sold to institutional investors.

Access pricing has increasingly become a source of conflict between Telstra and the regulator, the Australian Competition and Consumer Commission (ACCC).

Telstra has repeatedly accused the ACCC of giving competitors such as Singapore Telecom a free ride by allowing them cheaper access to the copper-wire network built by Telstra as Australia’s former monopoly.

Meanwhile, Telstra is forced to maintain unprofitable phone services to connect the Australian outback at a time when overall demand for fixed-line telephony is dwindling.

Last year, fixed-line revenues, which account for a third of Telstra’s total revenues, fell 6.7 per cent to A$7.5bn.

Earlier this month, Telstra scrapped a flagship broadband project because of a dispute with the regulator over rivals’ access to the future network.

Phil Burgess, Telstra’s head of regulatory affairs, told the FT last week that Telstra was facing an unduly powerful opponent, whose aims “conflict completely” with the government’s demands for Telstra to serve even the most remote locations. “The regulator here is judge, jury and hangman,” he said.

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