O'Sullivan said the Universal Service Obligation (USO), which requires carriers to subsidise Telstra's maintenance of regional and rural phone services, should be reformed.
"Current USO arrangements should be reformed so that Telstra's competitors be released from the requirement to pay a cash cross subsidy to Telstra.
"Instead, carriers would negotiate directly with [the] government on how their USO equivalent contribution would be used to improve competitive and innovative infrastructure investment in rural and regional Australia," O'Sullivan said in a statement.
Debate on the issue was recently ignited by Telstra regulatory managing director Kate McKenzie, who told an industry conference the USO was "not sustainable" in the longer term. Telstra claims a lack of funding for the USO is "holding back" profitability, and is a regulatory burden.
The Minister for Communications, Information Technology and the Arts, Senator Helen Coonan, has said the USO will remain "regardless of who owns Telstra".
Despite this, O'Sullivan said a fund to support such phone services should be designed to encourage carriers to enter the regional market.
"The principles for the effective distribution of monies should be that they are competitively and technologically neutral, competitively tendered and that they do not reinforce Telstra's dominance in the bush," he said.
Regulatory action was still necessary to stop Telstra unfairly leveraging its market dominance and widespread fixed-line network, O'Sullivan added.
"It is uneconomic for competitors to duplicate large parts of Telstra's fixed line network. So to unleash the power of competition, our government -- like the governments of other countries -- require the incumbent telephone company to sell its network services to competitors.
"This leads us to operational separation which we see as a necessary reform. At a minimum, Telstra should be restructured so that the access network, and core services delivered over that network, are managed by an Access Division. This would ensure negotiations between the Access Division and Telstra Retail are conducted on a genuine arms length basis and that pricing is transparent," the Optus executive said.