Operational separation is a legal framework designed to address concerns that arise from Telstra's ownership of the infrastructure which other telecommunications companies need to access and interconnect with in order to provide services to consumers.

Operational separation promotes transparency and equivalence in the supply by Telstra of key services to other telecommunications companies. The supply of key services which Telstra provides to other telecommunications companies must be equivalent to the supply of the services to its own retail business units.

Operational separation builds upon Telstra's existing business model and provides Telstra with greater regulatory certainty that it is treating its wholesale customers appropriately, without curtailing its legitimate commercial operations.

Key Aspects

Under operational separation, Telstra must maintain separate retail, wholesale and key network services business units. The wholesale business unit must be located in premises that are secure and separate from retail business units and staff members may not be employed by more than one business unit.

Telstra's retail business units must have no control over, or responsibility for, the marketing, contracting or supply of services to wholesale customers.

To ensure that sensitive wholesale customer information is kept confidential and inaccessible to Telstra's retail business units, staff in each business unit may not disclose confidential information to a member of another business unit unless authorised to do so by the customer. This prevents Telstra from gaining an unfair advantage for its retail business units from its wholesale dealings with other telecommunications companies.

The operational separation framework also requires that Telstra commit to key performance service indicators which measure the equivalence of delivery of services to other telecommunications companies. These indicators cover aspects of service delivery such as timeliness of service activation and fault repair, billing and access to exchanges. Telstra must also consider its wholesale customers' forecasts of network demand.

This framework expands the provision of information to Telstra's wholesale customers as Telstra is required to demonstrate that the provision of information offered to wholesale customers about relevant changes to Telstra's network is, to the extent possible, equivalent to the provision of the same or similar information to its retail business units.

Telstra must also establish notional contracts between its key network services business unit and its wholesale and retail business units respectively. This allows for greater transparency in the provision of network services to both wholesale customers and Telstra's retail business units, as it allows for comparison of the levels of support, availability, timeliness, technical and operational quality of support functions supplied to wholesale and retail businesses.

Operational separation also includes a price equivalence framework, which targets key services that wholesale competitors rely on to compete effectively. The framework will be used to test the revenue margin resulting from changes in wholesale and/or retail prices as a guide in identifying possible anti-competitive pricing conduct by Telstra. This framework provides competitors and the public with assurance that Telstra is acting legitimately in it's pricing of services, and provides Telstra with increased certainty that its pricing decisions do not contravene the Trade Practices Act.

Legislative Framework

Operational separation is implemented as a statutory condition of Telstra's carrier licence, specified in Part 8 of Schedule 1 to the Telecommunications Act 1997.

This required Telstra to prepare a draft plan for operational separation, undertake public consultation, and submit the draft plan to the Minister for approval. The draft plan was required to meet the legislative requirements set out in Schedule 1 to the Telecommunications Act and in two Determinations made by the Minister under the Act: the Telecommunications (Requirements for Operational Separation Plan) Determination (No. 1) 2005, (Explanatory Statement); and the Telecommunications (Operational Separation—Designated Services) Determination (No. 1) 2005, (Explanatory Statement).

After consultation with Telstra and the Australian Competition and Consumer Commission (ACCC), and taking into consideration the views of industry stakeholders and members of the public, the Minister approved the draft plan on 23 June 2006. The operational separation regime commenced on approval of the draft plan, and took full effect on 1 December 2006.

As required by the Minister's Determinations, Telstra's Operational Separation Plan provides for the provision of high quality wholesale services through the establishment of four strategies, a Price Equivalence Framework, and internal contracts. These documents are provided below:

• Operational Separation Plan
• Customer Responsiveness Strategy
• Service Quality Strategy
• Information Equivalence Strategy
• Information Security Strategy
• Price Equivalence Framework
• Internal Contract: Key Network Services - Retail
• Internal Contract: Key Network Services - Wholesale

Monitoring and Compliance

Telstra's operational separation plan requires that Telstra establish a Director of Equivalence to monitor and report to the Telstra Board on Telstra's performance against its operational separation obligations. This monitoring is supported by an external audit of Telstra's compliance. Telstra is required to present an annual compliance report to the Australian Government that sets out details of its compliance, including the external auditor's report.

Compliance with operational separation is enforceable by the ACCC and the Minister for Communications, Information Technology and the Arts.

Telstra is also required to provide information on request to the ACCC, as well as to compile and create documents that the ACCC deems necessary, in order for it to advise the Minister on Telstra's compliance with the plan.

Should Telstra be deemed to have contravened, or be contravening, the plan the Minister can direct Telstra to prepare a rectification plan that would need to be submitted within 60 days.