On 26 September David Quilty presented these ideas at the GAP Congress on Regulatory Affairs: "Opportunities for Business",  held in Parliament House of Victoria.

It is a pleasure to be here today and my congratulations to the GAP and to Peter Fritz for his leadership in putting this Congress together and for all the hard work in developing the ideas and the proposals that are being discussed.

The fact there are so many public policy leaders participating at the Congress is testament to the interest in and support from all levels of government for the GAP and for Peter's "second track" approach to taking forward what are often contentious, complex and hard to resolve issues.

The matter I wish to focus on today could certainly be defined in this way. Competition regulation in telecommunications in Australia is characterised by high levels of disputation; the spending of vast amounts of money usually for little discernible benefit for anyone involved; and a total lack of communications between those who play the game and the wider community.

Last year, Peter came to Phil Burgess and me and said he thought this issue was too important not to resolve and that, while he did not pretend to understand the complexities of it, there must be a solution if the right people are involved and they bring with them open minds and a spirit of goodwill.

So the Regulating in Technology-Rich Environments Taskforce was formed. Peter brought together a range of participants including Phil and me, Kim Williams from Foxtel, Henry Ergas from Concept Economics and a number of senior public servants from the Federal and Victorian Governments.

We set ourselves the task of devising a framework for a 21st century telecoms competition regime, recognising that whatever we came up with, it would be subjected to serious scrutiny and should stand on its merits in terms of its public policy credentials.

Everyone in the industry knows that Telstra's preference would be to abolish Parts XIB and XIC, the two arms of the telecoms competition regime, in their entirety and to revert to the generic, economy-wide competition regime. This paper does not call for such an outcome; instead it argues for changes to Part XIC to make it more efficient and investment focussed and to align it more closely with other sectors such as energy; as well as the retention of Part XIB.

The telecoms sector today is virtually unrecognisable from what it was in July 1997 when the communications regime was put in place. Back then, virtually all services were delivered over the fixed network. Though growing rapidly, mobiles were still in their early days. There was dial-up internet, but no broadband. There were very few players, prices were high and the focus was on the importance of fixed voice services.

Eleven years on, there are more than 100 carriers and many more service providers. Prices have fallen in virtually all segments, and in a number of areas, are a fraction of what they were. Exchanges covering over 90% of the population have ADSL broadband. Wireless broadband is available to 99% of the population and satellite is ubiquitous. There are more mobile than fixed services. Data is taking over from voice.

But the regulatory regime has remained virtually static. It has been subject to one serious review, by the Productivity Commission in 2001, the findings of which were largely ignored. It has been tinkered with to try and assuage various industry criticisms, but overwhelmingly one of the fastest-moving sectors in the economy continues to operate under a mid-1990s regime as we approach 2010.

If there is matter about which there is some consensus, it is around the importance of major investment in national high-speed broadband infrastructure. Of course this is not unique to the telecoms sector; the need for efficient infrastructure investment is economy wide. But the need for broadband infrastructure investment is generally agreed as is the fact that this investment has not been forthcoming, despite Australia's strong economy, proud record of early adoption and our technology pioneering spirit.

There is strong evidence that capital expenditure growth in the communications sector has slowed substantially over the last decade. At the same time that Capex growth in other sectors has increased, Capex growth in the Comms Sector has halved from 10.2% in the pre-1997 decade to 5.1% in the post-1997 decade. At the same time, Comms Capex has declined as a share both of GDP and of total economy Capex.

Whether the regulatory regime is to blame for the lack of investment in broadband infrastructure is, to some extent, a moot point. The fact is that this investment is very important for the nation; it has not occurred; the would-be investors require certainty; and, hence, a regulatory regime that encourages this investment and provides the necessary regulatory certainty is the desirable outcome.

On the flip side, it would be very hard to mount a strong case that the regulatory regime has been effective either in terms of encouraging investment or providing the necessary regulatory certainty for would-be investors. Telstra sought to take forward its Fibre-to-the-Node proposal within the scope of the regime, but could not reach agreement with the regulator on either costs or prices. On the other hand, Optus has used the regime to buy access to Telstra's fixed network even within the footprint of its own cable network - a truly bizarre outcome. In the mobiles market, which has remained largely immune from the regime, competitive infrastructure investment has continued apace, providing real choice and resulting in Australia taking the technology lead, rather than being a laggard.

The objective the Taskforce set itself was: how do we reform this regime in a way that will encourage investment and provide certainty for all involved; while at the same time ensuring that there continues to be fair and open access to true bottlenecks and a safety net to prevent and clamp-down on anti-competitive behaviour?

The first thing we noticed was the largely unfettered power and discretion that the telecoms regulatory regime places in the hands of the regulator. In telecoms, the regulator decides: what will be declared; the rules for deciding how the declared service will be regulated; and the application and enforcement of those rules including the pricing of third party access - and, in the case of declaration and price setting by way of arbitration, (the two most critical points) there is no merits review of the regulator's decisions.

The central problem with too much unfettered power centralised in one regulatory body, particularly if it is not accompanied by a clear set of rules, is that it does not provide the checks and balances required and the regulator and the industry players themselves, come to see regulation as a substitute for normal market behaviour.

21st century best practice demands a clear separation of the tasks of setting policy; converting policy into rules; and implementing and enforcing those rules. A good example is the energy sector in Australia. The Federal/State Ministerial Council on Energy (MCE) sets the national policy framework. The Australian Energy Market Commission turns those policies into a clear set of rules. The Australian Energy Regulator, which is a constituent part of the ACCC, then implements the rules.

A similar differentiation of the policy-making, rule-making and implementation functions is desirable in telecoms to provide greater clarity, transparency, predictability and accountability, all of which are likely to lead to enhanced regulatory certainty and more efficient regulatory outcomes.

Declaration is at the heart of any access-based regulatory regime because it determines the scope of third party access. In the economy-wide Part IIIA, there is a clear set of hurdles that must be met before a declaration can be made. The tasks of recommending and make a decision on declaration are separated, and declaration decisions are subject to merits review.

None of these happen in telecoms. Again this increases regulatory uncertainty and discourages investment. In the interests of regulatory best practice, clear hurdles for declaration should be specified and declaration decisions should be subject to merits review. Additionally, in a fast-moving sector like telecoms, it is highly desirable that declarations are time-limited and are revoked at the end of their life unless it can be affirmed that all of the hurdles continue to be met.

One of the most pronounced deficiencies of Part XIC is the fact it provides no clear guidance on how regulated prices should be set and how the various factors that should be taken into account interrelate with each other in determining whether prices are reasonable or not.

This is in stark contrast to Part IIIA which was amended in 2006 to include pricing principles which must be considered in determining prices. These principles require that regulated prices be set at a sufficient level to cover the efficient costs of providing access, including a return commensurate with regulatory and commercial risk.

The energy regime goes further, prescribing the methods for determining depreciation, the cost of capital and the valuation of new and existing assets. There are no such principles or requirement in telecoms, and given the levels of disputation around these issues, there is a strong argument for an explicit requirement specifying that prices should allow an investor to recover efficiently incurred costs and for setting out methods for valuating assets as well as the cost of capital.

In the interests of encouraging much-needed infrastructure investment, there is now a demonstrable imperative for clear legislative direction specifying that the regulator has an over-arching duty to promote efficient investment and provide incentives for innovation and the efficient, timely and reliable availability of services. The current legislative guidance to the regulator has clearly failed consumers on this front.

These reforms - differentiating between the various regulatory roles and providing clear guidance and greater accountability around the critical issues of declaration and the setting of prices - should be accompanied by changes to the regulatory processes to make them more efficient and timely, in the interests of regulatory certainty.

The scope to submit industry wide Undertakings was one of the key parts of the ‘architecture' of the Hilmer reforms, designed to reduce disputation, increase the efficiency and timeliness of outcomes and provide upfront certainty to all participants. Importantly, it was the mechanism by which ‘fit for purpose' regulatory mechanisms could be devised - mechanisms that, rather than a ‘one size fits all' approach, would be tailored to the features of the services covered by the Undertaking. In telecoms, there is the ability to submit Undertakings, and in fact government has expressed a preference of industry-wide Undertakings.

However, the Undertaking route has been spectacularly unsuccessful with very few Undertakings succeeding and a demonstrated inability of Undertakings to provide upfront certainty for would-be investors.

There are a number of reasons for this. First, there are no clear pricing principles or guidance on costs as I indicated earlier. Second, the regulator has near absolute discretion in terms of deciding whether an Undertaking is reasonable or not, with no requirement to rely on well-established principles, reasoning or weighting of the various relevant factors. Third, the lack of any merits review of arbitrations provides an incentive to reject Undertakings, so that the regulator can then set the terms of access in subsequent arbitrations which are not appealable.

A number of reforms are urgently required, which would provide benefits both to access providers and access seekers. First, there is a need for greater specificity around the rules that should be followed in responding to Undertakings, including by deeming that an Undertaking is reasonable if it is consistent with the pricing principles. Second there is a need to fix the flaws in the upfront Undertaking and Exemption provisions so they provide regulatory certainty to would-be investors. Third, there should be merits review of arbitrations. Fourth, there should be a requirement upon the regulator and the Tribunal to provide clear reasons why they have rejected an Undertaking plus clear guidance on what they regard as "reasonable" and how particular failings could be rectified in a future Undertaking.

Taken as a whole, these reforms would lead to a regime that is less intrusive, more predictable, more efficient, more accountable and, most importantly of all, more attuned to the imperative of efficient investment in telecoms infrastructure.

Importantly, these reforms would maintain the strong anti-competitive behaviour protections under Part XIB as well as the operational separation requirements on Telstra. Part XIB is much stricter that the generic Trade Practices Act, because it carries a much reduced burden of proof for the regulator.

I commend these reforms to this Congress. They would help align the telecoms regime more closely with modern, best practice regimes such as in the Australian energy market. Because of their strong focus on efficient outcomes and encouragement of investment and innovation, they would be good both for the telecoms sectors as well as for the consumers and businesses that use its services. They would open up opportunities for real choice and differentiation as well as a new era of strong, market-based competition underpinned by open access where true bottlenecks exist and a strong safety net to protect against anti-competitive behaviour.

David Quilty was appointed to Group Managing Director, Public Policy and Communications at Telstra on 1 September 2008. Most recently he held the position of Director of Government Relations and headed up a team responsible for representing Telstra's policy and political interests with Federal and State Governments. Before joining Telstra in January 2006, David worked as a Senior Adviser in the Cabinet Policy Unit from September 2003 to December 2005; and was Chief of Staff to the Minister for Communications, Information Technology and the Arts from May 1997 to September 2003. Prior to that, David worked in a number of political advisory roles, including a position of Senior Adviser to the Prime Minister and an Adviser to the Leader of the Opposition.

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David Quilty was a keynote speaker at the GAP Congress on Regulatory Affairs, held in Parliament House of Victoria on 26 September 2008 in Melbourne.

To read keynote presentations by other speakers, go to our 'Regulation as a Business Opportunity' discussion forum.

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• Regulating for Better Infrastructure - by David Quilty