The spectacle of the debate

Key Points:

The last 10 days have seen the most intense public debate and legislative activity in the telecommunications sector since the regulatory regime was re-designed in July 1997. In the midst of very robust public exchanges between Telstra and a variety of Federal Government figures and agencies, the T3 sale legislative package was introduced into Federal Parliament.

Verbal exchanges of the kind usually held in private were conducted openly through the media, often with seemingly unintended consequences:

• Telstra executives highlighted the impact of regulation on the Telstra share price on 2September.
• Senator Coonan responded on 4 September that if any proposed regulatory measures were significant, Telstra would have already notified the ASX under its continuous disclosure obligations.
• Telstra then promptly claimed on 5 September that regulation would have an $850 million negative impact on the company this year.
• ASIC then queried why the share market was not informed earlier of these regulatory impacts, particularly as they were disclosed in a briefing given by Telstra to the Federal Government on 11 August that had subsequently entered the public domain.
• Telstra subsequently released that previously confidential briefing paper to the market on 7 September.
• Various market analysts were perplexed as to whether Telstra had failed to inform the market of downside risk sufficiently early, or had actually belatedly implied that there was more downside risk from new regulatory measures than was actually the case.
• Senator Coonan queried why Telstra's line fault figures in the confidential briefing paper were higher than in Telstra's regulatory filings (following press claims that Telstra had failed to disclose the true state of its network).
• Meanwhile, the Telstra share price dropped as low as $4.26. Its market capitalisation has fallen by approximately $9 billion over the last 10 weeks.

All of this was an unwelcome and unexpected sideshow to the Federal Government's plans to introduce the T3 sale legislative package on 7 and 8 September 2005. That legislative package then developed its own controversy as the telecommunications industry and Labor Party claimed that it was being driven through Parliament too quickly. The Federal Government responded that it was simply the conclusion of a lengthy consultation process and the issues were well known and had already been fully debated.

This briefing paper focuses on the detail of the proposed legislative package and its impact.

The Legislative Package

The Legislative package was introduced over the course of 7 and 8 September and comprises the following bills and their accompanying Explanatory Memoranda:

• The Telstra (Transition to Full Private Ownership) Bill 2005 (Cth) ("T3 Sale Bill"), which authorises the T3 sale process.
• The Telecommunications Legislation Amendment (Competition and Consumer Issues) Bill 2005 (Cth) ("Competition Bill") which includes the important competition and access regime related amendments and is of most interest to the telecommunications industry.
• The Telecommunications Legislation Amendment (Future Proofing and other Measures) Bill 2005 (Cth) ("Future Proofing Bill"), which predominantly addresses the requirements of the National Party to approve the T3 Sale Bill (the $2 billion Communications Fund and the review, every three years, of the standard of telecommunications services delivered to regional, rural and remote parts of Australia).
• The Telecommunications (Carrier Licence Charges) Amendment (Industry Plans and Consumer Codes) Bill 2005 (Cth) ("Licence Charges and Consumer Codes Bill"), which addresses a range of less material industry issues.

In the case of T1 and T2, the sale legislation was often combined with other measures that were inextricably linked to the sale (typically rural and regional telecommunications funding measures). This time the package has been split into more logical component parts. One perspective on this approach is that the T3 Sale Bill is what the Federal Government needs to commence the sale process. The price to be paid for its passage through the Senate is the Future Proofing Bill and the Competition Bill.

Senate Committee hearing

A Senate committee hearing of one day was held on 9 September 2005 (to hear from the industry other than Telstra in the morning and to hear from Telstra in the afternoon) with a report due on Monday, 12 September. Participants were given less than 24 hours from the release of key parts of the legislative package to prepare. Calls by Senator Stephen Conroy, the Shadow Minister for Communications, for a longer hearing were rejected.

The Senate Committee recommended on 12 September that the bills be agreed to, subject to the Future Proofing Bill being amended to specifically require that $2 billion in cash be transferred into the Communications Fund Account. In a dissenting report, Labor has expressed concerns about the operational separation model, in the absence of detail about how it will be managed.

Do Telstra's concerns relate to the new legislation?

The proposed regulatory regime is not radically different to that foreshadowed by Senator Coonan in speeches for many months. It is consistent with her previous comments that there is great flexibility in the existing regime, that it requires a degree of finetuning and the addition of operational separation measures, but otherwise should remain intact. The market also expected a price for National Party support in the Senate, and this has been manifested in the proposed Communications Fund.

However, to understand the gap between Telstra's public statements and the legislative package it is necessary to appreciate that Telstra recently sought to re-open the regulatory debate in its entirety. A summary of Telstra's views is contained in its 11 August confidential briefing document for Senator Coonan which sought an entirely different approach to regulation and re-examined the basis of the 1997 reforms. It highlights a classic conundrum of regulatory lobbying where the financial position that a company wishes to present to support regulatory change may be inconsistent with the financial position communicated to the stock market.

The confidential briefing document makes many statements, but from a regulatory perspective it primarily focuses on the impact of proposed unconditioned local loop ("ULL") pricing and the impact the pricing will have on Telstra's revenues and profitability. The document concludes with Telstra's proposed "Digital Compact and National Broadband Plan" to provide next generation 6Mb broadband services. Telstra suggested that it would fund those services to 87% of homes and businesses, for $3.1 billion, and the Government would pay for the remaining 13% of the population, requiring a contribution of $2.6 billion.

In return, Telstra requested regulatory relief that included:

• the exemption of privately funded new infrastructure from the Part XIB competition notice regime and the Part XIC access regime of the Trade Practices Act 1974 (Cth) ("TPA") and operational separation;
• shifting regulatory burdens of proof to the regulators;
• a guaranteed ability for Telstra to be able to match competitor terms and prices; and
• a migration to general competition law with sunset dates for industry specific Parts XIB and XIC style regulation.

The confidential briefing paper should not be confused with Telstra's claim on 5 September that regulation will have an $850 million impact on Telstra this year. This statement responded to Senator Coonan's comments on 4 September that if regulation was damaging Telstra it would have informed the ASX under its continuous disclosure rules. It was following this 5 September statement that Telstra was required to release its 11 August confidential briefing paper as it had entered the public domain and therefore needed to be notified to the ASX (although it was originally prepared three weeks earlier in quite a different environment). The confidential briefing paper is a strategic forward looking document, not intended for public consumption. The $850 million regulatory costing statement was a much more limited document intended for public consumption.

The $850 million regulatory costing compares Telstra's profitability before and after existing telecommunications regulation, not before and after the new legislation. It re-bases the starting position to identify the cost of a range of historical regulatory initiatives. Telstra did identify the regulatory initiatives it was costing in this statement and the telecommunications industry understood the basis of the analysis. However, it was followed so closely by the release of the confidential briefing document and the new legislative package that press articles often confused the issues being addressed.

This sequence of events was so unexpected that it created great confusion.

What does the new legislation really mean for Telstra?

Telstra's 11 August concerns were not really targeted at new regulatory developments included in the legislative package. Rather, the briefing document seeks to wind back the 1997 reforms. Existing regulation is now reaching the point where it will facilitate real competition in the customer access network. It is the impact of new ULL pricing and the impact of that pricing on Telstra's profitability that appears to be its real concern. That pricing is the culmination of the eight years since the 1997 regime was introduced and almost six years since ULL became a declared service. It is not the result of the proposed new legislative package.

So how does the new regulatory score card look for Telstra?

• It is not facing material new regulatory initiatives, other than operational separation.
• Operational separation is a negative, but the process for implementing it leaves great scope for Telstra to influence outcomes. So if there is to be an operational separation regime (and there generally is in Australia's gas, electricity and rail access regimes), then this scheme is relatively attractive for Telstra.
• There will be a $2 billion Communications Fund and another $1.1 billion in rural and regional funding programs under Connect Australia. These are positives for Telstra, as it may be a recipient of a material proportion of the funding.
• The 1997 reforms will not be wound back, but then no-one was really aspiring to that scenario other than Telstra.

The T3 Sale Bill

The T3 Sale Bill is an updated version of the legislation proposed in 2003, but defeated in the Senate in October 2003 ("2003 Bill"). It is the critical piece of legislation in the package for the T3 sale process. However, given the manner in which ancillary issues are now addressed in the other bills, the T3 Sale Bill contains only the essential mechanics for authorising the sale process and provides the flexibility to deal with the types of complex offering alternatives that may have been proposed in the T3 Scoping Study.

Other than the 35% foreign ownership restriction (which remains unchanged) the sale mechanics are not likely to be intensely controversial. The telecommunications industry is largely agnostic about T3, provided that the competition and access regimes are palatable. The National Party, while hardly agnostic, accepts the sale subject to resolving the "future proofing" arrangements and other availability and quality of service related issues.

Key features of the T3 Sale Bill

The Commonwealth does not want to have to seek any further parliamentary approval for the sale process. Therefore, the objective of the T3 Sale Bill is to maximise the flexibility to dispose of the Commonwealth's Telstra shares. The 2003 Bill was already comprehensive in this regard, but the Telstra Sale Bill includes further flexibility, presumably as a result of the findings of the Telstra Scoping Study.

The T3 Sale Bill contains the following major features:

• Authorisation to sell - The Commonwealth is authorised to dispose of its remaining equity interest in Telstra by the repeal of the requirement for it to retain at least 50.1% of Telstra's equity. The timing of the sale will be a matter for the Commonwealth and will depend on a range of external factors.
• Offer flexibility - The Commonwealth will be permitted to dispose of its remaining interest via a single tranche, several tranches, or other approaches such as placements and may use a range of hybrid instruments and offering vehicles.
• Control of "equity dilution conduct" - The Minister for Finance may direct Telstra not to engage in equity-dilution conduct (conduct that will, or is likely to, result in a dilution of the Commonwealth's equity in Telstra and is not carried out under a Telstra sale scheme) or security-issue conduct (the issue of a security or financial product). This power is intended to ensure that any proposed access by Telstra to securities markets does not compromise the Commonwealth's objective of divesting all of its remaining equity.
• Assistance for the sale - Existing provisions requiring Telstra and its board to provide assistance to the Commonwealth (including the giving of information or assistance in connection with processes such as due diligence or market briefings) remain, with minor adjustments to reflect Corporations Act changes.
• Removal of general directions power - The current general power of the Minister for Communications, Information Technology and the Arts to give Telstra written directions, in relation to the exercise of its powers, as necessary in the public interest and for Telstra's to report to the Commonwealth will be repealed on the "85% sale day" (when the Minister is satisfied that the Commonwealth's equity has fallen to 15% or less).
• Sunset for remaining direction powers and reporting obligations - The other powers of direction (relating to equity-dilution conduct and security-issue conduct) and the reporting obligations will also be repealed on the "85% sale day". This preserves these obligations in the event of a multi-tranche offering.
• Ministerial determinations - Like the 2003 Bill, the T3 Sale Bill provides for a number of steps to be taken by way of Ministerial determinations or declarations. Unlike the 2003 Bill, the T3 Sale Bill provides that such legislative instruments are not subject to Parliamentary disallowance.
• Sale facilitation - The Minister for Communications will have the power to direct Telstra to provide information about the level of non-Commonwealth ownership of shares that is relevant to determining the "85% sale day" or the "designated day" (the day on which the Commonwealth holds less than 50% of Telstra, at which point amendments consequential to Telstra ceasing to be Commonwealth controlled will commence, for example preserving employee benefits). Additional stamp duty exemptions have been added to cover hybrid offers and securities lending arrangements.
• Insider trading defence - Under the proposed provision, the Commonwealth does not contravene the insider trading prohibition by entering into a transaction or agreement in relation to Telstra shares, sale-scheme hybrid securities or a Telstra sale scheme merely because of information in the possession of a Commonwealth employee or office holder in certain circumstances.

The Explanatory Memorandum confirms the possibility that some Telstra shares may be notionally transferred to the proposed Future Fund (to be established by the yet to be introduced Future Fund Bill 2005) for the purposes of unfunded superannuation liabilities, or that Telstra shares could be an investment in the proposed Communications Fund. For the purposes of ascertaining the "designated day" Telstra shares in either fund will be taken to be held by a person other than the Commonwealth. Therefore if all of the shares in Telstra were transferred to the Future Fund and the Communications Fund, but no public offer took place, a range of existing controls over Telstra would be lifted in any event.

The securities that may be offered for sale

The flexibility to pursue a wide range of options in the sale process has been maximised:

• Securities lending arrangements (relating to shares in Telstra) have been added to the list of the types of arrangements that a Telstra sale scheme may involve.
• The 2003 Bill provided for the Commonwealth, or a wholly-owned Commonwealth company, to issue sale-scheme hybrid securities and this concept has been retained and extended.
• Sale-scheme hybrid securities have been expanded to include an interest bearing security that is issued on the basis that it will, or may be, exchanged for a share or shares in Telstra and a security or a financial product that is specified in a written determination made by the Minister for Finance that relates directly or indirectly to Telstra, and also to provide that a security or financial product covered by the definition may (but need not) include a charge, pledge or lien (rather than just a charge over property to secure repayment, as in the 2003 Bill).
• Sale-scheme hybrid securities may be issued by the Commonwealth, or Telstra, or by two types of hybrid-security issuer companies. Category A hybrid-security issuer companies will be wholly Commonwealth owned and Category B hybrid-security issuer companies will be non-wholly Commonwealth owned and specified in a written declaration made by the Minister for Finance and Administration
• The Commonwealth is authorised to guarantee the obligations of a hybrid-security issuer company to make payments in relation to sale-scheme hybrid securities, for example payments of interest or dividends.
• The securities or financial products may be issued in Australia or overseas and may be denominated in Australian or foreign currency.

Re-affirmation of core consumer protections

A new Part 2C of the Telstra Corporation Act 1991 (Cth) is proposed that contains provisions re-affirming Parliament's policy intentions in relation to the universal service obligation, the digital data service obligation and the customer service guarantee. Presumably these somewhat unusual inclusions have been prompted by recent debate that has queried both the current arrangements and the longer term sustainability of these schemes, including public speculation by Telstra about the sustainability of the universal service obligation.

The 2003 Bill had made provision for a range of other "future proofing" measures, but these are now contained in the Future Proofing Bill (see below). Telstra's licence conditions were also amended in August 2005 to impose a local presence requirement that was previously contained in the 2003 Bill.

The Competition Bill

The first reading of the Competition Bill occurred on 7 September 2005. It is the bill that is of greatest interest to the telecommunications industry, as it potentially has the most significant impact on the competitive environment. It could be characterised as comprising a new regime for "operational separation", together with a variety of amendments designed to fine tune existing elements of the telecommunications specific provisions of Parts XIB and XIC of the TPA, the Telecommunications Act 1997 (Cth) ("Telecommunications Act") and the Telecommunications (Consumer Protection and Service Standards) Act 1999 (Cth) ("CPSS Act").

Operational separation

The Competition Bill provides for amendments to be made to the Telecommunications Act and consequential amendments to be made to the TPA to provide for the operational separation of Telstra. This is the major new initiative in the Competition Bill and it provides the first detail we have seen regarding the nature and implementation of this regime.

Until the 2004 Federal election delivered the Coalition a Senate majority, structural separation had been a focus of debate. However, it was fundamentally incompatible with the T3 sale process. Following the election, operational separation became the viable alternative and the best means of regulating the relationship between Telstra's wholesale and retail operations.

Senator Coonan had indicated in a variety of speeches this year that she was examining the UK's experience with operational separation as a possible model. In the UK, BT had offered operational separation as a means of avoiding a regulatory reference that could ultimately have led to its forced structural separation (a motivating factor that does not apply in the Australian context for Telstra). Several months ago the ACCC recognised the reality of the new Senate majority and shifted away from structural separation towards advocating operational separation in public speeches. Telstra has consistently rejected operational separation, although it has recently made commercial adjustments in this direction, such as creating a wholesale division and appointing a "Director of Equivalence".

The market has eagerly awaited the operational separation measures in the Competition Bill. However it simply contains a system for developing an operational separation regime, not the regime itself. That system contains a number of procedural weaknesses that indicate that it may be unlikely to produce a regime that will meaningfully address the concerns it is intended to remedy.

The proposed scheme

The operational separation regime has the following components:

• A new set of licence conditions for Telstra establishes the process for developing an operational separation plan and rectification plans (if Telstra contravenes the operational separation plan).
• The ACMA and the ACCC can enforce the rectification plan, but not the original operational separation plan.
• A requirement for the Minister to review the regime before 1 July 2009.

The Minister has consistently stated that she wants Telstra to develop its own plan and the Competition Bill certainly emphasises this. However, the question is whether Telstra will develop an effective plan. It has previously been announced that DCITA will be forming a committee to discuss the operational separation regime and that both the ACCC and Telstra will be represented on that committee.

Under the amendments, new carrier licence conditions will apply to Telstra that achieve the following:

• A draft operational separation plan must be directed towards the achievement of specified statutory aims and objects and also deal with such matters as are specified by the Minister.

These objects include:

• a principle of equivalence to apply in relation to the supply of "designated services" to Telstra's wholesale customers and retail business units;
• Telstra is to maintain one or more wholesale business units, retail business units and key network service business units;
• the promotion of substantial organisational and operational separation between these units; and
• the promotion of responsiveness by Telstra to the needs of its wholesale customers.
• A draft operational separation plan must provide for the annual reporting by Telstra of its compliance with the plan, and the independent audit of the extent to which Telstra has complied with the plan.
• Telstra has 90 days from the commencement of the relevant provisions (which needs to be within six months of the passage of the legislation) to provide the Minister with a draft operational separation plan.
• If the Minister rejects the draft operational separation plan, she may direct Telstra to make amendments to the plan and re-submit it.
• If the Minister approves the draft operational separation plan, then it will become a "final operational separation plan". However, the final operational separation plan is not directly enforceable.
• If Telstra has contravened, or is contravening, a final operational separation plan, the Minister may require Telstra to prepare a draft rectification plan. The process for reviewing and approving this plan is similar to the process for finalising the operational separation plan.
• If a final rectification plan is in force, Telstra must comply with the plan (and this obligation forms a standard carrier licence condition).
• The Minister may direct Telstra to vary a final operational separation plan or a final rectification plan.

The ACCC or the ACMA would be able to give Telstra a direction to comply with a final rectification plan if Telstra has contravened or is contravening, that rectification plan. It is proposed that the ACCC and ACMA would each have the power to commence proceedings in the Federal Court seeking recovery of a civil penalty in relation to Telstra's failure to comply with a condition of its carrier licence.

Defects in the proposed regime

The operational separation regime has been subject to press criticism for allowing Telstra to "write its own rules". The fact that Telstra is preparing a first draft is not surprising, as operational separation inevitably involves complex operational issues that Telstra is arguably best placed to consider in the first instance. Operational separation in the gas, electricity and rail industries in Australia generally began with this step, as have the undertakings offered by British Telecom in the United Kingdom.

Nevertheless there are major differences between the proposed regime and operational separation regimes already implemented in Australia in other access industries, and which are under development in the United Kingdom in the telecommunications sector:

• Typically it is the economic regulator, rather than a minister, that implements and manages the scheme. Under the proposed scheme any mention of the ACCC is conspicuously absent until the final step of enforcing a rectification plan. While the Minister will no doubt informally consult with the ACCC, there is no formal requirement to consult with the ACCC.
• Telstra's ongoing drafting control throughout the process.
• The lack of enforceability of the operational separation plan itself and the additional step under which the Minister requires a rectification plan, which becomes the enforceable instrument.

In operational separation the devil is in the detail, so to the extent that Telstra controls the end to end drafting process, it will have subtle but critical influence over the document that will ultimately be approved and which the industry regulators will need to enforce. As currently contemplated, it may be a slow process to enforce operational separation in any meaningful sense.

Interaction with other elements of the regulatory regime

Interestingly, the accounting separation regime, regulated by the ACCC, is not linked in any manner with the operational separation regime that will be regulated by the Minister. Accounting separation should really be an integrated component of any operational separation structure.

The isolation of the operational separation regime does not end with accounting separation. It also has no clear connection to either the competition notice regime in Part XIB or the access regime in Part XIC. Operational separation, together with those regimes, should form an integrated package. For example, the operational separation regime should be providing output data and benchmark pricing relevant to access arbitrations. It should also provide a methodology that simplifies the enforcement of the access regime and operation of the competition notice regime.

The Competition Bill does include an oblique reference requiring the ACCC to take into account operational separation when making decisions under Parts XIB and XIC, so the ACCC is required to have regard to the operational separation plan prepared by Telstra. However, the reverse is not true and Telstra is not required, in preparing its operational separation plan, to serve the purposes of the ACCC. Therefore, to the extent that there is a link, it has the appearance of the tail wagging the dog.

Competition-related provisions

The Part XIB competition notice regime has been left largely untouched. However, the Competition Bill proposes to increase the maximum penalties that the Federal Court may impose on a body corporate that has contravened the competition rule. Currently a contravention by a body corporate attracts penalties of $10 million and $1 million for each day the contravention continues. The proposed amendment increases the maximum per day penalty from $1 million to $3 million for each day the contravention continues beyond 21 days.

Access-related amendments

The "Procedural Rules"

The ACCC has faced a number of challenges in implementing the access regime, largely because of its statutory procedural requirements. Delays are caused by a range of problems, but the ACCC is of the view that procedural "gaming" is one of them. The "Procedural Rules" will be developed by the ACCC for its practice and procedure under the access regime. The existing statutory procedures would continue to apply unless and until the ACCC makes Procedural Rules that modify or displace them. In short, the Procedural Rules allow the ACCC to fix perceived problems with the access regime processes.

Interim determinations about access

The Competition Bill improves the operation of the interim determinations that the ACCC may make in relation to the resolution of access disputes. The ACCC will be permitted to make or vary an interim determination in certain circumstances, without observing any requirements of procedural fairness (eg. consulting parties to the arbitration). The ACCC can also remake an interim determination for a period of 12 months once the 12-month period of the initial interim determination has expired.

Enforcement of conditions and limitations of exemption determinations and orders

The ACCC can currently exempt a carrier from compliance with the standard access obligations. If it does so, it usually applies conditions to the exemption and that exemption and associated conditions comprise an alternative regime to the standard access obligations. However, the conditions cannot be enforced directly if breached. The Federal Court will now be able to enforce compliance with such a condition or limitation applying to an exemption from the standard access obligations (on the application of the ACCC, or a person affected by the breach).

Long-term interests of end users

Enhancing the "long-term interest of end users" is one of the objectives of the existing access regime, and a component of this is encouraging efficient investment in existing infrastructure. The ACCC will now be expressly required to consider the encouragement of investment in future and alternative infrastructure when considering the long term interests of end users. This confirms existing ACCC practice, but is likely to become a means by which carriers advocate that the ACCC give closer consideration to future investment when making current access decisions.

Any-to-any connectivity

"Any to any connectivity" is another of the objectives of the access regime and is intended to ensure that any person connected to a network can communicate with any person connected to another network. An existing gap in the regime has been the inability to require a large carrier, as an access seeker, to acquire access from a small carriage service provider, as an access provider. For example, if a carrier is so small that Telstra has no incentive to terminate calls to the small carrier's network. A new standard carrier licence condition will now address this. The ACCC will arbitrate disputes where the parties cannot agree on the terms and conditions on which the service will be supplied.

Additional amendments

• Enforceable undertakings. ACMA will have the ability to accept enforceable undertakings to ensure compliance with both the Telecommunications Act and the CPSS Act. The undertakings would be enforceable by the Federal Court on the application of ACMA.
• Industry development plans. The Telecommunications Act currently requires carriers to have an approved industry development plan at all times that imposes an unnecessary administrative burden. The Productivity Commission has previously recommended the removal of this requirement, and this recommendation has now been accepted.
• Industry codes. ACMA currently enforces industry codes registered under Part 6 of the Telecommunications Act. New provisions would expand the circumstances in which ACMA may issue a direction to comply with a registered code or may issue a formal warning to a person contravening a replaced industry code.

Other minor amendments have been made to the provisions of the Telecommunications Act.

The Future Proofing Bill

The Future Proofing Bill contains provisions relating to two fundamental elements of the T3 legislative package:

• Schedule 1 of the Bill inserts a new Part 9C of the CPSS Act under which the $2 billion Communications Fund is established, a requirement of the National Party to support the T3 Sale Bill; and
• Schedule 2 of the Bill inserts a new Part 9B of the CPSS Act that provides for regular, independent reviews of regional telecommunications by the Regional Telecommunications Independent Review Committee ("RTIRC").

Press reports have referred to the $3.1 billion in funding for rural and regional telecommunications that has been secured by the National Party and this figure is comprised of:

• $1.1 billion of funds previously announced by Senator Coonan on 23 August as part of the Connect Australia initiative. The entire amount of this capital can be spent on suitable projects, although the detail of its component schemes are not yet known.
• $2 billion to be used to establish a Communications Fund, the income from which will be spent on rural and regional telecommunications projects. The capital will not be spent.

The Communications Fund

The income stream from the assets in the Communications Fund will be used to finance the implementation of the Government's response to recommendations of the RTIRC, for incidental or ancillary purposes and to make grants of financial assistance for those purposes. The Communications Fund will consist of a Special Account for the purposes of the Financial Management and Accountability Act 1997 ("FMA"), referred to as the Fund Account, and the investments of the Fund.

The amount of the Communications Fund has caused considerable controversy over the last couple of days. The responsible Ministers (the Minister administering the FMA and the Minister administering the Future Proofing legislation, once enacted) may determine in writing that "a specified amount is to be credited to the Fund Account on a specified day" and that the total of the amounts specified in such determinations "must not exceed $2 billion".

Queensland Nationals Senator, Barnaby Joyce announced that he was reconsidering his support for the legislative package on the basis that the wording of the Future Proofing Bill did not guarantee that $2 billion would in fact be available in the Communications Fund.

In response, the Prime Minister has confirmed that the Government's intention is that $2 billion will be available and "not a penny less". Senator Coonan has also confirmed that the Future Proofing Bill will be amended to put it "beyond contention that the Communications Fund will consist of $2 billion cash". Senator Coonan stated that the current wording of the Future Proofing Bill was intended to provide flexibility in the event that non-cash assets, such as shares, were used. Following the Senate Committee report of 12 September this issue is likely to be specifically addressed by amendment.

The Future Proofing Bill provides no real detail as to how the Communications Fund will be managed and utilised. The information released by DCITA in relation to Connect Australia states that responsibility for allocating funding to implement recommendations of the RTIRC will be given to an independent board appointed by the Government. DCITA has also stated that funds would not be used for maintenance of existing services or ongoing operational costs and that funding would be provided "to encourage a competitive response".

The Future Proofing Bill provides that money in the fund may be invested in "financial assets", which are broadly defined. The responsible Ministers may authorise the investment of money in the Communications Fund. "Investment" is broadly defined to include "any mode of application of money or other property for the purpose of gaining a return (whether by way of income, capital gain or some other form of return)". Income derived from investments, a return of capital, or any other financial distribution relating to an investment of the Fund is to be credited to the Fund Account.

Expenses of the Fund are to be debited from the Fund Account. The responsible Ministers may authorise the realisation of investments of the Fund, the proceeds of which are to be credited to the Fund Account, and the re-investment of proceeds of maturing investments. The acquisition of derivatives may be authorised by the responsible Minister for specified purposes:

• enhancing or protecting the value of another investment of the Fund; or
• enhancing or protecting the return on another investment of the Fund.

The Future Proofing Bill also provides for grants of financial assistance for the purposes of the Fund, by debits from the Fund Account, to a State or another person.

Connect Australia

No further detail is provided about the Connect Australia funding package of $1.1 billion that was announced by Senator Coonan on 23 August 2005 as involving the following components:

$878 million for Broadband Connect - to provide all Australians with affordable broadband services;

$113 million for Clever Networks - to roll out innovative broadband networks for new applications to improve the delivery of health, education and other essential services;

$30 million for Mobile Connect - to extend terrestrial mobile coverage and continue satellite handset subsidies for more remote areas; and

$90 million for Backing Indigenous Ability - to deliver a comprehensive package addressing phones, Internet and videoconferencing in remote Indigenous communities and improved Indigenous radio and television.

The Future Proofing Bill simply contains a provision acknowledging the Government's intention to introduce legislation to appropriate that amount and that the amount of $1.1 billion will be in addition to the Communications Fund.

There is likely to be significant industry interest in the proposed allocation of the Connect Australia funding initiatives and utilisation of funds from the Communications Fund as further details emerge. According to DCITA statements on regional funding programs, following the announcement of Connect Australia, regional telecommunications program funding between 1997 and 2009 will total $4.027 billion (including the Connect Australia initiatives and the Communications Fund of $2 billion).

Telstra is on record as supporting such funding programmes, which is not surprising as it has been a major beneficiary of them. Regional funding to date, including that provided from T1 and T2, has been criticised as failing to improve services or to increase infrastructure competition. The majority of the funding has been provided to Telstra.

Regional telecommunications reviews

The process for the reviews is not fundamentally different to the mechanics included in the 2003 Bill, or more recently in the Telecommunications Legislation Amendment (Regular Reviews and Other Measures) Bill 2005 (Cth) introduced by Senator Coonan in March, but which ultimately did not proceed. However, in response to criticisms regarding the frequency of the reviews, the period between reviews has been reduced from five to three years.

The first of the independent reviews is to take place before the end of 2008 and each subsequent review must begin within three years of the completion of the previous review.

The RTIRC will be required to provide a report on the findings of its review to the Minister. This report is then required to be tabled in each House of Parliament, within 15 sitting days of the relevant house following the Minister receiving the report.

The Minister will be required to prepare a statement responding to any recommendations of action by the Commonwealth. This statement must be tabled in each house of Parliament within six months of the receipt of the report.

In determining the adequacy of telecommunications services in regional, rural and remote parts of Australia, the RTIRC must have regard to whether people in those parts of Australia have "equitable access" to telecommunications services that are:

• significant to people in those parts of Australia; and
• currently available in one or more urban parts of Australia.

The Explanatory Memorandum states that these criteria are to ensure that there is "an independent assessment of the state of important telecommunications services, including the relative availability and affordability of such services and the demand for them". It is not clear that the specified criteria in fact facilitate consideration of these matters. In addition, it is not clear how the availability of a service in urban areas is necessarily relevant to the standard or adequacy of services in other areas. People in regional, rural or remote areas may need different services to people in urban areas.

Other measures

In addition, the Future Proofing Bill will amend:

• the Telstra Corporation Act to provide that at least two directors of Telstra must have knowledge of, or experience in, the communication needs of regional, rural or remote areas; and
• Part 6 of the Telecommunications Act, which deals with industry codes and standards, to include a scheme under which industry bodies and associations that develop consumer-related codes (such as ACIF) may apply to ACMA for funding prior to commencing code development.

Finally the Licence Charges and Consumer Codes Bill will enable ACMA to recoup costs incurred by industry bodies such as ACIF in developing consumer-related codes of practice.

The code related charges reflect the Government's increased focus on consumer-related codes. On 5 September 2005, Minister Coonan announced that she had written to the CEOs of all major service providers indicating that the Government expects the industry to develop an effective code of practice to protect consumers against unexpectedly high bills without delay, or the Government will consider more direct action, which could include requesting ACMA to consider commencing the process for making an industry standard.