Telstra should get up before it's a train wreck

To paraphrase Dwight Eisenhower, it is neither wise nor brave to lie on the tracks of history and wait to be run over by the train of the future. After decades of avoiding structural reform, the whistle of an approaching train must be all too audible for Telstra this week.

Telstra had a good innings. The consumer has paid the price.

Successive governments have done little to weaken Telstra's advantage over its competitors. It controls the infrastructure they depend upon. It has been permitted to dominate every platform and every service, from telephones, to pay TV, to mobile telephones, to broadband. As a result, Australians pay too much for their telecommunications and receive too little.

The Keating government created the problem and the Howard government did nothing to fix it. Not wishing to disrupt privatisation, it prevented the Productivity Commission considering structural reform in 1998. It ignored Australian Competition and Consumer Commission advice in 2002 that Telstra ought to divest Foxtel. It cried blue murder when regulatory risk was listed in the T3 prospectus - a risk that has now come to pass.

Given this, it is a bit rich for Telstra shareholders to now claim they were not on notice about regulatory reform. Telstra dividends do not come with a government guarantee.

The carnival is now over, and consumers stand to benefit. The structural reforms announced on Tuesday will correct the errors and omissions of the past, promote competition and lead to lower prices and better services.

From failing to fix line faults, to claiming its local exchange buildings are "full", Telstra has made life difficult for access seekers for years. Separation should end this. If successfully implemented, it should ensure competitors are treated no less favourably than Telstra's retail business.

Telstra will probably succumb and play ball, preferring to set its own separation terms than submit to the Government's. It needs spectrum to compete with the National Broadband Network, and its retail business is formidable when combined with Foxtel. It will not want to lose either.

The constitutional implications add complexity. By effectively making any divestments optional, the Government may avoid a constitutional acquisition. If this does not work though, expect a compensation showdown in the High Court.

The Government's other reforms to the Trade Practices Act are overdue. Currently, in theory, carriers are given the right to negotiate a commercially acceptable access price with Telstra, to minimise involvement of the ACCC. In practice, Telstra does not co-operate. Bargaining gets access seekers nowhere, Telstra stalls for time and the ACCC invariably intervenes. It has arbitrated 150 access disputes since 1997.

This system is convoluted and costly, serving the interests of no-one but those who make their living by perpetuating endless litigation. It does nothing to help consumers.

Under the new regime, the ACCC will have the power to set the terms up-front and its umpire powers will be strengthened. Currently, if Telstra behaves anti-competitively, the ACCC has to consult the industry before it can do anything. Often the whole thing ends up in the Federal Court. The process ends up taking years, by which time the damage is done.

So the reforms should go a long way to fixing the problems of the past. The future however, complete with Government-sponsored network, is not quite so clear. The NBN presents two serious problems - each of which could seriously harm competition.

First, the reforms will muddy the waters when it comes to the transition to a fibre-based network. Why go to the effort and expense of separating assets that may well be made redundant by the NBN? A wholesale-only Telstra may find itself selling copper wire in competition with optical fibre - a bit like selling carrier pigeons to mobile phone subscribers. Or it might end up leasing unglamorous ducts and telephone poles to the NBN. It looks like investors are going to need convincing that wholesale-Telstra has a decent lifespan.

The outlook for access seekers is equally uncertain. Structural reform will make it easier to rent lines from Telstra. However, it remains to be seen whether increasing investment in soon-to-be obsolete access products is a good long-term bet. It would be terrible for competition if the sector treads water until 2018 waiting for fibre.

Second, the Government is playing with fire. By weakening Telstra, it may be killing the only foreseeable competitor to the NBN. It may also force Telstra (and the other carriers) to join the NBN. Either outcome could potentially reduce competition.

If the history of telecommunications in this country is anything to go by, it will be a while before the implications of the new policy are clear. One thing is certain, change is in the air and it would be neither brave nor wise for Telstra to remain on the tracks.

Allan Fels is the former chairman of the ACCC.