TELSTRA GROUP LIMITED — Call Transcript 2007

Jan 24, 2007

25 January 2007

The Manager

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ELECTRONIC LODGEMENT

Dear Sir or Madam

Transcript from Telstra's teleconference - High Court challenge

I attach a copy of the transcript from yesterday's teleconference for release to the market.

Yours sincerely

Fread

Fiona Mead Acting Company Secretary

TELSTRA CORPORATION LIMITED

TELECONFERENCE 24 JANUARY 2007

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ANDREW MAIDEN: Thank you. Ladies and gentlemen, Andrew Maiden here from Telstra. Thank you for joining this call at short notice. In a moment I'll introduce our two presenters, Dr Phil Burgess, who's the Group Managing Director of Public Policy and Communications, and Will Irving, who's Telstra's Group General Counsel. They'll speak for about 15 minutes to let you know what we've done today and why and then we'll have some time for questions from those on the phone. At the end of today, we'll have a transcript of these proceedings. Most of you have already received the press release by email. If you haven't received it you can get it online by visiting by the ASX or Telstra.com. So I'll introduce Will Irving now to describe what Telstra has done.

WILL IRVING: Thanks, Andrew. To set up what we're doing today, we're launching a High Court challenge to the validity of the telecommunications access specific part of the Trade Practices Act as it applies to our unbundled local loop, otherwise known as ULL service, and our line sharing service, known as LSS.

Telstra shareholders had their property compulsorily acquired under this regime. They're forced to hand over to Telstra's competitors the last mile of copper, that's the copper between the exchange and the consumer, so that our competitors can provide voice and data services using either the ULL or the LSS services. Furthermore, for the loss of this property, our shareholders are forced to accept the prices set by the ACCC and these prices don't represent fair or what are known as "just terms" for compensation as guaranteed by the Australian Constitution. It's like the ACCC telling you that that you're required to rent a room in your house and then telling you to rent it out for \$17.70 a month.

As you know, the Constitution exists to protect the rights of all Australians and under the Constitution the Government has the power to compulsorily acquire property but it can only do so where it does so on just terms. Specifically, there's a section in the Constitution, section 51, which sets out the powers of the Federal Government and section 51(xxxi) - written in Roman numerals, or 51 in normal numerals and then xxxi for those writing it down - of the Constitution provides that the Parliament may make laws for good Government with respect to - and then specifically section 51(xxxi) which is with respect to the acquisition of property on just terms from any State or person for any purpose in respect to which the Parliament has the power to make laws. Under section 51(v) the Federal Government has the. power $\pm$ make laws with respect $\mathbf{f}$ telecommunications.

So what Telstra is looking to do is looking to the Constitution to protect the rights of approximately 1.6 million direct investors, most of them ordinary Australians who've invested their savings directly in Telstra, and also millions more Australians who've invested through super funds in Telstra.

Part XIC of the Trade Practices Act - that is the telecommunications access specific part of the Trade Practices regime - has a constitutional safety net provision at section 152EB and that section is meant to enshrine the constitutional protection over property rights by providing a right of compensation. However, we believe that constitutional safety net is flawed because it doesn't allow Telstra to launch an action for compensation. It doesn't work because the provision doesn't cover the acquisition of property resulting from the operation of what are known as the standard These, amongst other things, imposed a legal access obligations. obligation on Telstra to supply what are known as declared services to our competitors. And it's this obligation to supply declared services that gives rise to the acquisition of property, not an ACCC determination, which is what's referred to in that section 152EB which is that constitutional safety net provision.

So what we're doing today is launching this constitutional challenge and it's entirely appropriate and timely that we do so given our duty to protect our shareholders and pursue all avenues to preserve their rights as intended by the frame of the Constitution. We're therefore asking the High Court to rule that the access regime is invalid for ULL and LSS, given the failure of that section 152EB to be constitutionally valid.

However, we're not trying to prevent access to the network by access seekers, or to stifle competition. What we are after is a fair return for our investors, the owners of the network assets that we are currently being forced to sell at below cost prices. We're writing to access seekers today reassuring them of the continuation of supply while these legal issues are addressed.

I'm sure there will be a temptation for some to leap straight to the issue of compensation. But let me be very clear about what we're doing today: we're challenging the validity of the legislation and whether it allows us to pursue compensation. We say it doesn't and it's therefore invalid. As a result the question of compensation is some way off at the end of the process that we're starting today. The first stage is to answer the question - whether the act is valid and whether there is an appropriate mechanism for compensation - because that's exactly what the Constitution was put in place to do, to protect the property rights of all Australians, including Telstra shareholders.

					This challenge lets Telstra demonstrate that the way the
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telecommunications access regime operates is unfair on shareholders, undermines competition, and we believe is unconstitutional. If the legislation in invalid, any remedy will be a matter for Government and we will then be in a position to assess all options. I'll now hand over to Dr Phil Burgess.

DR PHIL BURGESS: Thanks, Will. The proximate cause of the action we're taking today was the decision by the ACCC just prior to Christmas to issue interim determinations for spectrum sharing, sometimes referred to as LSS, but spectrum sharing, at just \$3.20.

For years Telstra has tried to work hard within the framework set out by Part XIC of the Trade Practices Act, including access, arbitrations and undertakings, to see whether the framework, despite its defects, could it's been provide reasonable compensation. The verdict is now in: impossible to achieve a fair result within the current framework. The. framework allows arbitrary and capricious actions by the ACCC that are hostile to property rights that are a key to jobs, growth, and economic development in the digital age. It's also been impossible to achieve any reasonable change to the framework or regulatory settings that would increase the chances to obtain a fair outcome. If you remember last almost a vear and a-half ago, we laid out the National Broadband Plan, which was a comprehensive effort at regulatory reform, coupled with large investments that would make - bring broadband to 98 - over 98 per cent of all the people in Australia.

Telstra considers that it is now - it now has no other option but to ask the High Court to enforce the Australian Constitution. The ridiculously low spectrum sharing price, which even the ACCC is having trouble justifying, will, if not changed, do irreparable harm to the industry and to the ACCC decisions forcing ULL and spectrum sharing national interest. prices to even ever lower levels despite the fact that costs are increasing. some dramatically so, is wrong-headed and not in the best interests of shareholders, competition or consumers. And the ACCC is making these decisions in an arbitrary process without the benefit of a robust cost The ACCC is steering the industry model to guide decision making. toward a price spiral, some might call it a price war that will see turbocharged competition in the cities. The fact is we're headed for this short term price war resulting in carnage in the industry, consumers left with failing providers and services, and continued below par investment in the nation's broadband future.

Telstra's shareholders are being asked to subsidise this price war by giving away assets below cost, at the same time also maintaining high costs services in rural areas where others refuse to build and operate. In fact, the ACCC's anti-rural approach to ULL pricing where it wants to use a deaveraged method ill-suited to a sparsely populated nation like Australia, is actively discouraging competition from offering ULL based services

outside the city.

This situation is another example of how the current regulatory environment is holding Australia back; parked in the bottom half of the OECD list of developed nations on broadband penetration. Rather than making genuine infrastructure investments, Telstra's competitors are given more and cheaper ways to take a free ride on the Telstra network, even though Telstra's costs are increasing. For example, fuel rose by 52 per cent between September 2002 and September 2006. Copper and brass used in manufacturing has increased 76 per cent, yet our prices are being lowered by 55 per cent.

Telstra was first required to supply spectrum sharing services in July 2002, setting a price in the \$11 to \$15 range. We put in an undertaking at \$15 but in July of 2004, two years after setting the price range between \$11 and \$15, the ACCC rejected Telstra's spectrum sharing undertaking and indicated the price range was now somewhere between \$7 and \$9 so we lodged a further undertaking at \$9. But despite the fact that that was in the ACCC's range, it rejected that price as well. So Telstra appealed this decision to the Australian Competition Tribunal which upheld the ACCC's decision to reject the \$9. It didn't set an alternative price but the ACCC came back and issued an interim determination setting the LSS or spectrum sharing price at just \$3.20. It's a long way from \$15 in 2002 to \$3.20 around the Christmas period when every other price - every other cost in the spectrum that we are working in - fuel costs, vehicle costs, labour costs, copper costs - have all gone up, some dramatically so.

An unprecedented \$3.20 spectrum sharing price has undermined the business case for ULL, and it vandalises high-speed broadband build-out. even though spectrum sharing is an inferior service outcome, the price signal is driving huge spectrum sharing growth while ULL is stagnating. However, ULL and spectrum sharing will not lead to improved services for consumers in the long run. ULL and spectrum sharing are short-term solutions to providing ADSL services and these services will be limited in geographic reach for higher speeds creating high-speed enclaves for those lucky enough to live in areas close to telephone exchanges and everyone else will be left to shift for themselves.

In the absence of real and costly investment in new fibre-based technologies, ACCC policies and practices ensure that Australians will not get access to the next generation of very high speed data applications while foreign-owned competitors reap huge profits at the expense of Telstra's shareholders.

This is a case we will continue to make. We will make it because Telstra shareholders deserve a fair return on their current investment and should not have their pockets picked to subsidise the ACCC's pricing policies. Policies by the way, that are contrary to the government's policy as opposed to the regulator - the government's policy of national uniform prices.

So we have a real conflict here. It is not between Telstra and the government; it is between the government and the regulator. The government has a policy of a national uniform price where everybody everywhere, in the bush and in the cities, should pay the same price. The regulator has a policy that the people in the central cities should pay substantially less, almost one-third less, than people in the outer suburbs and the people in the bush are left to pay over \$150; whereas the people in the central cities can pay \$7.

It doesn't make any sense. The government policy knows it doesn't make any sense but the regulator skates on with these off-the-charts decisions on pricing as if no-one will care or pay attention. Well, we care, we are paying attention and we are going to go to the Courts to ask them to enforce the safety - the protection that is provided by the Constitution.

So we are writing on this to access seekers - today we are writing to access seekers reassuring them of the continuation of supply of services while the legal issues are being addressed. This is, as we said, because we are not trying to prevent access. Let me repeat that: we are not trying to prevent access but we are trying to be permitted to get a fair commercial return for our property; a commercial return that is determined by real costs plus a competitive return, not by arbitrary and capricious decisions by the regulator.

Telstra is compelled to pursue the interests of shareholders because the operation of legislation is weighted against allowing Telstra just terms, compensation for its property loss and that is unconstitutional. It is a furphy put about by Telstra competitors that Telstra shareholders received a gift of the network from the taxpayers of Australia. This is very important to get resolved on the head in.

The fact is the taxpayers of Australia have been repaid billions of dollars. over \$70 billion for the network that was once owned by the government. The assets of Telstra are now fully in the hands of shareholders and they must have access to their constitutional rights as a fair compensation. If this doesn't happen one of the fundamental rights of citizenship will have been swept away by the bureaucratic power of an unrestrained regulator and a fundamental value of this nation is respect for property rights and we will have surrendered them without a fight if we don't make this request of the Court to enforce the Constitution. We will not let that happen without a fight.

Telstra will always fight to ensure the rights of its shareholders. Telstra will fight for the right to deliver high-speed broadband to make sure that this nation is not left behind as new digital technologies and services

shape the 21st century and the course we are on today means that we are headed toward a dead-end on broadband while the ACCC's policies are creating a broadband dead-end. That is not in anyone's interests. And the ACCC's policies are also undermining competition, that is not in anyone's interests. It is not in the national interest what is happening and it violates the fundamental terms of our Constitution.

ANDREW MAIDEN: Thanks, Phil. We now have time for some questions from the media and at the end, if time permits, we will also be able to take some questions from analysts who have also joined the call. So could we have the first media question?

OPERATOR: Thank you. We have Jesse Hogan from The Age from Melbourne.

QUESTION: Hi Phil and Will. If successful, would your action result in ULL not being a declared service?

WILL IRVING: ULL will remain a declared service. It is really up to the government how it chooses to fix the issue. It can amend the legislation, it can have the ACCC come up with prices which will provide us with just compensation. As we said, what we are about is an outcome to get just compensation for the network assets. In the short run, yes, invalidity of legislation would mean that ULL would cease to be supplied but we fully expect the government will act to solve that issue. What we are about is getting a fair return on our assets.

QUESTION: And how much have you already spent preparing this action and how much have you set aside to spend?

WILL IRVING: This action is quite a limited legal action, as I have outlined. It is focused on a particular section of the Act so the costs are relatively low. We are talking \$1 million, perhaps a little bit more in total, to run this action. It is not one of these large pieces of litigation that you see which involve, you know, hundreds of thousands of documents. It is a very direct legal point and that is part of the reason why we have taken this action in the way that we have. The ACCC came out with its decision shortly before Christmas and that decision has very big stakes for the company, given the impact it has across the whole of our network investment. So it is really a tiny investment, if you like, in some legal fees and we have tried to do it in a way to minimise the costs to all involved but to get the outcome that we believe is fair and just, given the terms of the Constitution and the right that Telstra has.

DR PHIL BURGESS: Yes, a tiny investment with witness big stakes.

WILL IRVING: Yes.

QUESTION: And assuming it does go all the way to Court, do you have any idea about a time frame about when that would happen?

WILL IRVING: We are in the hands of the Court on that one. We would expect at least some indication of a decision on the narrow question of invalidity, hopefully by the end of this year, but you know, in Court terms that is moving pretty quickly, given that it is the High Court we are As a constitutional matter the High Court has original approaching. jurisdiction over these issues so it will decide the course of the action from there.

QUESTION: Thank you.

DR PHIL BURGESS: Just to go back to your original point though, I think it's really important to emphasise this is not about whether ULL would be a declared service, it's about the prices that can be charged for the ULL service and that's why we're sending a letter to reassure all the users of our ULL services that that will continue, so I just want to make sure that everybody understands that. This is about price. This is about just compensation. It's not about a provision.

QUESTION: All right, thanks for that.

ANDREW MAIDEN: Thanks, Jesse. Can we have the next question please?

OPERATOR: Thank you, the next question comes from Fleur Leyden from the Herald Sun.

OUESTION: Hi there. I note your comments about, you know, compensation and damages at the start of the call, but could you at least give us some indication of what they could amount to if the challenge goes all the way?

WILL IRVING: It really depends on the take up of those services. At the moment there are few hundred thousand services that are being supplied under this pricing, so that the problem to date is not huge, perhaps in the order of sort of tens of millions and that's part of the reason why, having had this decision a few weeks ago from the ACCC, we're acting promptly. We don't want to have uncertainty and we don't want a damages bill to get any bigger than it has to be. We're really looking to the government to fix this issue, having, you know, pointed out the problem and a constitutional problem is not one that they can work their way around, unless they're prepared to deal with the problem.

QUESTION: Thank you.

WILL IRVING: It can get a lot bigger over time.

QUESTION: Thank you.

OPERATOR: Thank you. Next we have Tony Boyd from The Australian Financial Review in Sydney.

OUESTION: Yes, thanks very much. I just wondered have you taken advice from outside from Senior Counsel on this.

WILL IRVING: Yes, certainly we have. Again I'm, for obvious reasons, not going to discuss the legal advice that we have. You will have seen a number of articles about legal professional privilege of late, but as you would expect this action has been given a high degree of thought.

OUESTION: I assume it's not Lawrence Hamel?

WILL IRVING: I'm not prepared discuss who we have used. The Senior Counsel who are involved in the matter will be on the record at the appropriate time.

OUESTION: And just a quick question for Phil. You said that there was basically the government's policies of subsidising a price war. It seems all the analysts are upgrading your earnings because of your increasing prices in broadband and increasing revenue in Broadband.

DR PHIL BURGESS: So what's the question?

QUESTION: Well, the question is, there doesn't seem to be a price war, prices are going up, I believe.

DR PHIL BURGESS: Well, this just happened in December. This edict just came down from the ACCC in December and that's another reason to follow up on, Will says, why we move quickly on this. There's the opportunity if this goes unchallenged to do irreparable damage, not just to Telstra's shareholders, but to the industry. If there is a price war by a spiralling down of prices below cost everybody is going to get hurt. When you have a price war Tony, who survives? The strongest survive, not the weakest, so if we have a price war, induced by the ACCC's pricing policies, we head for a price war where, you know, who is left standing? Telstra certainly will be left standing. Probably Optus will be left standing and the rest will do sayonara.

So, you know, that's not in the interests of Telstra. You know, the fact is contrary to popular belief, we have a very strong interest in a health, competitive telecommunications environment here. The more players, the stronger they are, the niches they fill all help us to do the kind of business that we want to do an in turn we can help them do the business they want to do. After all, our RTTN build out was going to be available to all

providers, not just to Telstra. It was to be available to all providers on the same terms and conditions it was available to our business units, so that every provider in this country could be providing this, could get bit stream services to provide the most advanced Telecommunication services, eventually reaching deca-megabits. Megabits measured in the hundreds, not in the tens, to everybody in this country. So, you know, our interest is in a healthy, competitive telecommunications environment that has lots of players and where the ACCC is taking us is toward a duopoly that benefits nobody, not the least this country, and so we want to nip it in the bud if possible.

OUESTION: Well, just a quick follow up on that Phil, if the financial impact of \$3.20 which sounds as though it's going to be quite serious from what you said, has John Stanhope run some new numbers? I mean, on 15 February will you be coming out with some sort of fresh financial forecasts?

DR PHIL BURGESS: We don't have to run numbers to know what we're going to do, Tony. I mean, you know, in a competitive environment in general and in a company headed by Sol Trujillo, you don't sit around and say, well, let's analyse if we're going to compete. You know, what you do is you compete and if people start lowering the prices, we're going to lower our prices. I think the ACCC, who have too many people who've spent their time as analysts and not enough time running a company on behalf of shareholders, don't understand that we're not going to stand by and watch other people pillage our market and just, you know, keep charging \$9. We'll go down to whatever levels the ACCC set. The ACCC sets prices. Most places around the world price setting is viewed as a bad thing but here price setting is viewed as a good thing until people understand the facts, and the facts are that below cost price setting by a regulator leads to the destruction of an industry. What we have here is broadband vandalism. Now I use the term vandalism advisedly because vandalism is really wanton and deliberate destruction of value with no apparent gain. You know, if a robber goes out and steals something, at least he has the right to use what he steals - the benefits to use what he steals until he gets caught and brought to justice, but when you vandalise something, it's for no purpose at all. Nobody is a winner and I ask you who is the winner in a price war? Nobody.

QUESTION: No. well - - -

DR PHIL BURGESS: The consumer doesn't win, the industry doesn't win the industry doesn't win, the national interest doesn't win and believe me, at the end of the price war we will not have one more subscriber to high speed broadband. I'm not talking about broadband bubblegum at, you know 8 megabits a second or 20 megabits a second. I'm talking about broadband in the 30 to 50 to 100 megabits a second. That's what this country needs to be headed for and the ACCC is preventing it.

OUESTION: Just on that ACCC, did you FOI? Obviously you got some documents out of that process. Did that confirm and sort of lift up your determination to take this action?

WILL IRVING: I think it's probably easier, rather than talking about the documents that came out of the FOI process, the FOI process was really around the issue itself and some particularly, again, wording that the ACCC had had in a previous decision that it had handed to us so the FOI request served its purpose. It was successful in terms of achieving the objectives we had set for it. This Court action really comes out of these decisions of the ACCC: the one in August on ULL and the one on 21 December on the Line Spectrum Sharing Service.

OUESTION: And Will, is that guy from Gilbert and Tobin, George Williams, the sort of public law director, is he right when he says that you must show that there's property involved and the significant issues is whether or not there's been an acquisition or property. Is that right?

WILL IRVING: It is absolutely right that we have to show there has been an acquisition or property when we look at the copper line in the case of ULL where we hand over the copper, it gets connected to somebody else's equipment. We have no right to use in any way that equipment. We believe that is our property being taken. If I can draw an analogy of you and your car, it's one thing to give someone a lift in your car and drop them off at the end, which is, I suppose, what we've tended to do historically in the telco space. In this case we effectively give them the keys to the car and say you go away and bring it back when you feel like. We have no ability to use the car, do anything with it, it's theirs for all practical purposes and we say that is sufficient property acquisition for the purposes of the Constitution and that's why we are talking this action.

DR PHIL BURGESS: And that's the difference between our case and the BHP case isn't it?

WILL IRVING: Well, BHP is under a difference part of the - well, again, it's under part 3A which deals industries other than telecommunications so it's a different scenario entirely.

DR PHIL BURGESS: But in terms of using a railroad, the railroad is still there to be used by the other party.

WILL IRVING: Well, that's right, yes, and a lot of the other services that we supply and the reason you haven't seen a constitutional case from us previously is we have tended to be able to, to pick Phil's analogy, go on using the rail line but in this case we haven't. Once that copper is connected to their equipment, in the case of ULL, we have no ability to use it at all and once it's connected in the context of the Line Sharing Service,

again, for broadband, we have no right at all to use our property.

DR PHIL BURGESS: So you lose access to the property.

WILL IRVING: That's right. For all practical purposes the property is theirs not ours when they have connected our copper to their network.

QUESTION: Okay, thanks.

ANDREW MAIDEN: Okay, next question please.

OPERATOR: Thank you, we now have John Durie from the Australian Financial Review in Melbourne.

QUESTION: Hi Will, I'm just confused, you've got a lot of these issues up before the Federal Court or the Competition Tribunal which is yet to make its decision on the ULL issue. Why aren't you waiting for that process to run out?

WILL IRVING: The two processes are quite separate. The constitutional challenge we're talking about today relates to decisions made by the ACCC in access disputes with specific access seekers, over which we have no appeal rights. Under law we are not entitled to go off to the Competition Tribunal and appeal these decisions around \$3.20 or \$17.70.

What's before the Competition Tribunal is appeals over the rejection by the ACCC of undertakings, and to pick the example that Phil spoke about before we had an undertaking we had put in at \$9. The ACCC rejected that. We appealed that to the Competition Tribunal. But that has nothing to do with the \$3.20. We cannot go to the Competition Tribunal to appeal \$3.20. As I said before we have exhausted all the avenues that we have. We have tried to work, you know, within the regime as it was formulated. The regime has failed to work properly. We believe that the regime is, in fact, as it relates to these services at least, invalid and that's why we're taking this action.

We are still waiting on judgment in the ULL appeal. You're quite right about that. We will wait and see what that says. If that gives us a better outcome, that's great, we will assess that. Again, as Phil has said and as I've said, the issue is about the price that we get. If the ACT, the Competition Tribunal, ends up giving us a route to a fair price for our shareholders, terrific. You know, that's one way of the problem being solved, but I've got to say based on what we've seen today, I think we will be - let me put it this way, very pleasantly surprised if we were to get an outcome that was as favourable.

QUESTION: Yes, just quickly tying up, I didn't hear your answer when Fleur asked about what sort of compensation we're talking about here.

Could you just repeat that, sorry?

WILL IRVING: Yes. What I was saving was to date we've had a few hundred thousand services on a monthly basis that we're supplying under these prices. So if I was to look back historically, you're looking at tens of millions. The real question is how long does this last for and how many services are taken up? If you get millions of services taken up over a long period, you rapidly get into much larger numbers than tens of millions.

DR PHIL BURGESS: It's Phil. Another point that I think that gets missed in a lot of the commentary that has occurred in the past around this issue is people forget it's - the losses to our shareholders are not just the losses on the take off of spectrum sharing or below cost pricing on ULL, the losses also have to include the losses we incur in meeting the competition in the market place. So we also, for all our millions of customers, we have to meet the competition in the market place which simply weakens Telstra, or weakens the industry, probably fatally damages some of the smaller players, and leaves everybody else worse off.

OUESTION: Yes. Well - - -

DR PHIL BURGESS: Somehow there's this mistaken view that investment a mistaken view by people in high places that investors are attracted to low prices not higher prices.

OUESTION: Sure.

DR PHIL BURGESS: The fact is that nobody is attracted to invest when you can't have cost based pricing, when prices are set by a regulatory and not by a market. And if they are set below cost, you get no investment. And guess what, this isn't a matter of opinion, this is a matter of fact. We're not getting investment in this country, so - - -

QUESTION: Sure. Phil, can I just - the only other time - Phil, when the Tribunal has looked at your pricing structure it's declared your ideas unreasonable.

DR PHIL BURGESS: Well, let me say that - - -

And in this case you're saying that the ACCC is OUESTION: unreasonable. The only - - -

DR PHIL BURGESS: Well - - -

QUESTION: --- major case we've had before the Tribunal has gone the other way, so I just wonder where you're - - -

DR PHIL BURGESS: Well, I guess, John, it depends on whether, you know,

you think about business as what a Tribunal says or what a market says.

OUESTION: Well if the ---

DR PHIL BURGESS: The market says that the prices don't cover the cost. That's why you don't have any investment.

OUESTION: Yes. But - no. but - - -

DR PHIL BURGESS: So where's the investment, John?

WILL IRVING: Sorry, just (indistinct).

DR PHIL BURGESS: Where's the investment, John?

OUESTION: Okay. Okay.

DR PHIL BURGESS: Well, no. no. I'm asking. I mean, you know, let's have a dialogue on this.

QUESTION: No, but I - I'm - - -

DR PHIL BURGESS: I mean, you know, we've got to have an understanding in this country and especially from - --

OUESTION: Yes, but Phil - Phil - - -

DR PHIL BURGESS: - - - you guys who voice - - -

QUESTION: Phil, what's it got to $-$

DR PHIL BURGESS: --- the views of so many people, you know.

QUESTION: Yes.

DR PHIL BURGESS: You know, we can talk about what Graeme Samuel says, and what the Tribunal says, and what this bureaucratic element says and so on. The fact is nobody is investing. Nobody is investing.

QUESTION: Okay. Phil---

DR PHIL BURGESS: So how do you answer that?

QUESTION: Phil, okay, let's cut to the chase. So what you're effectively saying is this system here doesn't work and you want it overturned? That's $all --$

DR PHIL BURGESS: Say what?

OUESTION: That if the system doesn't work because you reject any - you -

PHIL BURGESS: Yes, right. That's the way public policy works in most countries.

OUESTION: Okay. But you tried that, Phil - - -

DR PHIL BURGESS: The people make public policy makers make decisions and $-$

QUESTION: Yes, yes - - -

DR PHIL BURGESS: --- sometimes they're right and sometimes they're wrong. And when they're wrong, what they do is correct them. We're asking for a correction.

QUESTION: Yes. Phil, you tried the same stunt with - when - in your US West days. Do you think you'll be more successful this time?

DR PHIL BURGESS: No. it wasn't a stunt. The whole regime in the United States was changed because the Supreme Court of the United States came to the view that Telco's were being asked to give up their property without just compensation. Guess what, sound familiar? And guess what happen after they changed that, you had massive investment in broadband in the United Sates. Is there a relationship? Yes, there is. You know, when people can earn a fair return on their investment they invest.

WILL IRVING: Can I just pick a point on that as well and that is that when the Competition Tribunal looks at these issues, it's got a very narrow scope to look at confined by the legislation itself. This clause that we're talking about here is there precisely because the Government recognised that narrow scope that the ACCC and the ACT has to look at may, in fact, not provide what the Constitution requires which is just terms. So the scope that ultimately the High Court will look at in terms of this issue about the validity and ultimately about compensation, if and when we get there, is a much wider, general - generally applicable test about what is just terms. It's not tied down in the very narrow way that exists under the Act when the ACT looks at it. So the fact that the ACT rejected something under the ground it has to look at something, in no way says "Yes" or "No" as to whether that was just terms or not.

ANDREW MAIDEN: Okay. Time for another couple of media questions.

UNIDENTIFIED SPEAKER: Thank you. We now have Matt O'Sullivan from the Sydney Morning Herald.

QUESTION: Thank you guys. Just a couple of questions, probably first for Will. Will, would it be fair to say that this could run on for the next two vears?

WILL IRVING: That's possible. Again, we're in the hands of the Court in terms of the timing.

QUESTION: And will this, you know, this Court case delay any decisions on access prices to your network?

WILL IRVING: That's really a - ultimately a decision for Government and for the ACCC in terms of how they choose to respond.

OUESTION: How do you expect them to respond them?

WILL IRVING: Well, I think, that really is an issue for them. What we're focused on is the issue of the legislation and its validity. There are many ways that they can deal with the issue. They can, in fact, make a number of decisions very quickly and solve the issue if they so chose. Really, I think it's a question you need to address them as to how they propose to deal with it. We're very clear about we - what we are about, it's about having the constitutional rights that we have to be forced by the Court to deal with an issue where we are having our property taken away from us in a way that we believe does not give us the just terms that the Constitution requires.

QUESTION: Phil, what do you say to competitor's claims that you're really - I mean, this is a tactic aimed at delaying any decisions on prices for access to the networks?

WILL IRVING: Not at all. We've waited for those decisions to be made and now we're taking this action. This isn't a case of trying to, sort of, play games. This is about saying, "Those decisions have been made. We have been given these decisions. We are supplying these services at the prices that have been mandated. They are below cost. They're below what the Constitution requires and that's why we're bringing this case."

OUESTION: Okay. Thank you.

ANDREW MAIDEN: Okay. Last media question before we turn to analysts.

OPERATOR: Thank you. We have Stuart Corner from the Exchange Publications in Sydney.

QUESTION: Yes, good morning. The whole issue here is that you can't agree with the price that the ACCC suggests you should charge. Even if it is successful, what's going to happen? Are people just going to have to

wear the prices that tells - that Telstra tells them that they'll have to pay, and it's going to be purely a unilateral decision by Telstra what the prices for line sharing and ULL, should be?

WILL IRVING: That all depends on the Government's response. If the Government chooses to do nothing and the section is declared invalid, then it will be a matter for commercial negotiation. The Government may choose to deal with it another way by amending the legislation. And the ACCC may choose to deal with it by providing a price which provides just terms compensation.

OUESTION: Well, no that doesn't - that's exactly what the ACCC is doing now, so it claims. So that isn't going to make any difference is it?

WILL IRVING: Well I think that - again, that's a - ultimately it'll be a matter for the Court. But the ACCC at the moment has a very confined list of things it is required to take into account when making these decisions. What we're saving is the Constitution requires just terms. It's a broader concept than what you find in Part XIC. So if the ACCC chooses to interpret Part XIC in a way that equals the answer that you get under the Constitution, problem solved. If the Government chooses to legislate, it can do so: again as long as our shareholders are being appropriately compensated there are multiple ways for that to occur. That's a matter for the Government and the ACCC.

QUESTION: So do you believe that this action could result in the ACCC being directed to calculate its prices in a different way so that it comes up with a figure that's satisfactory to Telstra?

WILL IRVING: That's certainly one solution to it, yes.

DR PHIL BURGESS: You know, I mean, I think put another way, I think, you know, the ACCC could be directed to comply with the Constitution, you know, and that's number one. Number two there are legislative remedies to this. I mean, I want to go back to this basic point. We are not asking for relief from ULL declaration. We are not asking to have, you know, totally unregulated prices, although, you know, we'd accept that if somebody wants to give it, but what we are saying is that there needs to be a reasonable connection between costs and prices.

QUESTION: Yes, well that's the whole nub of it - - -

DR PHIL BURGESS; Beg your pardon?

QUESTION: --- that you and the ACCC can't agree what that reasonable price is.

DR PHIL BURGESS: No, that's right and that's why we need relief and

that's why is $a$ ---

OUESTION: So you'll end up with that - - -

DR PHIL BURGESS: $--$ that's why there is a legislative solution to this. The legislature can provide guidelines that would ensure that there would be a reasonable nexus between the cost and the price.

QUESTION: Did you ever believe that the legislative outcome could be that the price the ACCC determines is satisfactory to Telstra? It seems to me vou're always going to get these differences between what Telstra wants, or says it wants, and what the ACCC comes up with.

DR PHIL BURGESS: Well, that may be but, you know, the Constitution does say there has to be, you know, a reasonable compensation for property that's used for (indistinct) - - -

OUESTION: Yes, I know, but what's reasonable? I mean, what Telstra say is reasonable is not the same as the ACCC says is reasonable.

DR PHIL BURGESS: Yes, right. It's about - look, I think that when people in the legislature realise what the ACCC is doing, that the ACCC in fact is a rogue agency, that it's not following the policies of the government on national uniform prices, they will find a way to establish rules for price setting that allow for the recovery of costs and that's all we're asking for and, you know, I have faith in that process. I don't have faith in a bunch of economists who use abstract models and other gimmicks from the economics profession to come up with pretend costs and then impose them on us.

QUESTION: Aren't Telstra's models abstract? I notice your model is not public, so no one can tell just what model you've used.

DR PHIL BURGESS: The model we want to use is called accounting data. You know, we know what our costs are. We write cheques every week to cover our costs. We report those costs out twice a year.

OUESTION: Yes, but how you apportion those costs - - -

DR PHIL BURGESS: Our CEO and our CFO attest to those costs under $oath --$

QUESTION: Yes, but how you apportion those costs to someone how wants to use part of your network is the whole issue and that's very difficult to determine.

DR PHIL BURGESS: We know what the costs are. I mean, I can, you know, any time - we've laid those costs out many times. People just don't like what they see.

OUESTION: So why don't you make the model public then?

Because we're not talking about models, we're DR PHIL BURGESS: talking about accounting and those numbers are public.

Well, I mean, to work out the cost that you should charge OUESTION: your customer is based on some sort of model because they (indistinct).

DR PHIL BURGESS: (Indistinct) requires us to do. They require us to come up with a model. We think we ought to get away from these abstract models. If the regulator who has 100 per cent of the power tells you to do something, you either have to do it or you have to take them to Court, so up till now we've done it. Now we're going to Court.

QUESTION: Okay. Thank you for that.

WILL IRVING: Okay, thank you for that Stuart. We have time now for a couple of analyst questions.

OPERATOR: Thank you and we have Phil Campbell from City Group in Sydney.

QUESTION: Morning guys. Just a couple of questions for you. Firstly, I was wondering if you could give us any legal precedents where, you know, a case like this has been brought in the past and what the decisions were. I suppose this is slightly unique because it is more Telco focussed but if there are any other, you know, precedents that would be useful. The. second one I had was in relation to, when I read the interim determination from the ACCC, you know, it wasn't quite as black and white as, you know, charging a price and accepting or rejecting it. There was talk of rebalancing between a line sharing price and wholesale line rental price so I'm just interested if you could give us some views in terms of that solution for when the ACCC comes up with its final decision in March, and then the final question was really, you know, you want a fair price for access. Are you able to give us your thoughts at the moment on what you think that fair price is, because obviously if you were to win the \$30 ULL decision, you know, prima facie that could actually lead to an increase in broadband prices in Australia so any comment or thoughts on that would be good as well?

WILL IRVING: I might pick up the precedents one first. Look, each case is unique. This case is a very specific case about a particular section of the Act. There hasn't been a case dealing with an equivalent section in the past so in that sense I don't think there is, at this point in time, anything that is, you know, of particularly sort of crucial, if you like, precedential value which would give you the answer and almost by definition often

constitutional cases are like that because if the answer had already been laid out, the parties would have resolved the issue and clearly that hasn't occurred. So from that perspective, you'll go and talk to no doubt all sorts of legal experts and get all sorts of opinions.

So, again, what I would come back to is one that was made before and that is that unlike perhaps some of the litigation that has occurred elsewhere in the world which has dealt with sort of regimes as a whole, this is detailing very specifically with these two particular services which are services where our copper line or parts thereof are provided and where we have no ongoing rights to use that property. So it is about an acquisition of property rather than just about a general sort of complaint that the rates are sort of somehow unfair, and in that context we think there are sufficient precedents in the way that the High Court has looked at these issues but clearly it has not looked at this particular issues before.

In terms of sort of wholesale line rental and line sharing costs and so on. I think that your comment is right. We really need to wait and see the text of whatever final determination is handed down by the ACCC and then we'll be in a position to make an assessment in terms of, you know, what they say and how that goes forward. At this point in time those prices that we've spoken about are the prices that are ruling. That's what we've supplying services on today and that's why this action is appropriate at this point in time. I don't know if you wanted to pick up the last part of the question.

I think in terms of price, what Phil said before is exactly right, and that is that it ought to be for the market to decide these things. We know our competitors have said publicly they have very high margins from supplying these services, so clearly they have got a lot of - I recall one figure of sort of 80 per cent being mentioned by one of our major competitors as a margin. So there is no reason why sort of prices at the consumer level ought to It really is about the way that we are currently - or our change. shareholders are currently providing a subsidy to our largely foreignowned competitors and their shareholders.

ANDREW MAIDEN: Okay, thank you. We have time for two more analysts' questions.

OPERATOR: Thank you, we now have Andrew Levy from Macquarie Bank.

QUESTION: Thanks. I just wanted to clarify, obviously on one hand we know, you know, what you are going to be allowed to charge via the ACCC ruling. Is then, the second part of that, the Court is going to have to decide what they think an appropriate cost is, so would you expect from them their own decision or a third decision. I suppose, in the market on what the appropriate cost is for those services?

MR IRVING: Look, it all depends on how the government and the ACCC chooses to react, to deal with the issue. That is one path that we may ultimately need to go down. We would be hopeful that sense will prevail. They will recognise the issue that is here; as a result of this, more limited and quicker legal action and we will get a practical resolution which is to the interests of the industry in terms of certainty and in the interests of investment. Again, as Phil outlined, you know, very clearly we believe there ought to be incentives to invest in this industry and invest in our networks to provide better services for all Australians and to provide those real high speeds that the economy is going to need.

If we end up in years and years and years of litigation that is not going to be to anyone's benefit, but ultimately clearly that is one path that this may take if, you know, if the powers that be decide that they are just going to sort of keep their heads stuck in the sand.

OUESTION: But then is the presumption then that the ACCC thinks that the current pricing structure is destructive or below cost? Have they said that anywhere?

MR IRVING: You would need to go and ask them what they think about it. Again, they have specific criteria in the legislation they are obliged to apply. The section that we are talking about today is there to allow for the fact that, in fact, that may - those sections may not give Telstra, or anybody else for that matter, just terms compensation which is what the Constitution requires, so as you look at this you have got to look not just at what the ACCC has said, but as Graham will tell you, he is there to apply the law as it stands. What we are saying is the law is not providing just terms compensation.

Now how that gets fixed is ultimately a matter for Parliament and/or a matter for the ACCC; you know, the ball is in their court.

Thank you.

ANDREW MAIDEN: Last question, please.

OPERATOR: Thank you, the last question comes from Patrick Russel from Merrill Lynch in Melbourne.

Good morning, everyone. Look, just a couple of QUESTION: Yes. questions in relation to how the case will be sort of conveved. I am clear you will have to prove that damages on the company will be substantial from the LSS at \$3.20. I am just, you know, if you look at the company's current guidance, you know, cash flow return on investment is going to improve from something like three or four per cent to, you know, eight, 10 per cent, according to the company's current projections. If you look at cash-flow target, about \$7 billion, 2010; capex is going to come down so

return on capital incrementally and in total terms will actually be well above WACC at that point in time, so you are still getting, you know, what appears to be from a financial point of view substantial excess returns on employed capital.

So I am just wondering how you argue that point and then really to do that you might have to say that that target is indeed not achievable in light of \$3.20 and as such you will have to put in some material reductions in that target and as such, move away from the guidance target. Because otherwise, you know, if I am sitting there in Court and I say "well, hang on, you guys are getting substantial returns above your cost and capital: show me where the damages are to total returns?"

WILL IRVING: Yes, the Court case is not about - again, we are not arguing about the regime in total in terms of what percentage return we get or not. There have been cases elsewhere that have run those kind of arguments. This case is not about that at all. This case is about what it costs us to provide those copper loops and the price that we are now entitled to charge or are forced to charge by the ACCC when we supply those to our competitors. So whatever the margins are or anything else are irrelevant from the purposes of the Court case.

To the broader issue of the \$3.20 and the guidance, our results will be out You will recall that we disclosed in the T3 offer on 15 February. documentation that we had received the draft at that stage, we didn't have the actual decision. We had received the draft \$3.20 from the ACCC. That was disclosed so to the extent that that was there, that is already built in and John Stanhope will comment further on 15 February in relation to the forward looking position.

ANDREW MAIDEN: Okay, thanks ladies and gentlemen for attending this. As I say, the transcript will be available late this afternoon or early this evening. The first place you will see it is on the ASX website when it is disclosed. $It$ will also be available on Telstra's website. nowweretalking.com.au. Thank you very much.

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