As foreshadowed by NBR this morning, Telstra has failed to lodge a full bid for the Australian government's proposed $A5 billion National Broadband Network (NBN). The move has shocked the telco community, which had expected either Telstra or the government to blink at the last moment following the past 24 hours' Mexican standoff.

Telstra did not submit a full bid because the government could not provide any clarity on whether it was safe from a Telecom NZ-style operational separation.

Instead, following an emergency board meeting this morning, Telstra has made what it calls a "counter proposal" in the form of a 13-page open letter to Communications Minister Stephen Conroy from Telstra Chairman Donald McGauchie (above), offering to cover 90% of the population - and only 65% to 75% of the population at the full 25Mbit/s broadband speed. The government's request for proposal calls for 98% coverage.

Mr McGauchie also says his company would not build the more limited network outlined in its counterproposal unless the government supplies Telstra with a $A4.7 billion "concessional loan" on top of the $A5 billion in taxpayer funds earmarked for the megaproject. Telstra also demands a no operational separation guarantee for the life of the network.

Telecom-owned AAPT's withdrawal from the Terria consortium's NBN bid on October 21 left Telstra the only serious bidder for the new network, and the telco is clearly looking to make the most of its bargaining position.

"Telstra's proposal is subject to a number of conditions for the life of the project, including no further separation of Telstra and regulatory certainty," the company says in a media statement.

It elaborates in its open letter: "We now have substantial evidence of the failure of operational separation in the UK and NZ to deliver large scale NBN investment in either country."

Telstra is also thought to be be asking for a guarantee of a 20% commercial return on the network, while AAPT and others are asking for regulated NBN access and pricing.

The market reacted well to Telstra's strings-attached proposal, with the telco finishing six cents up on teh ASX.

Mr McGauchie's letter as a downloadable PDF on Telstra's website.