Entry No.23f

IT Writers Awards

Telstra may be relieved of its duties to provide reasonable services in the bush, Selina Mitchell reports.

PROVIDING standard telephony services at reasonable cost across Australia is not easy or cheap, Telstra says. But the Federal Government and the giant telco's competitors are not so sure. They are keen to open up the universal service obligation (USO) to competition. At the moment Telstra provides what many regard as a fundamental social obligation -- the assurance that all Australians no matter where they live or work have access at a reasonable cost to standard telephone and digital data services and to payphones.

Telstra is the only carrier responsible for providing the USO, but the associated costs are dispersed through the industry in proportion to market share. ``It has been government policy since 1996 to increase competition and efficiency,'' a spokesman for Communications Minister Richard Alston says. ``We don't believe any carrier has a mortgage on delivering USO.'' The Government is hoping competition will create a more efficient and effective USO provision, perhaps using satellite or wireless local loop technologies. The Australian Telecommunications Users Group (ATUG) is keen to see the technologies used to provide the USO move on from traditional copper-based services to more advanced options, managing director Allan Horsley says. For its part, Telstra would like to see someone else try to provide the USO. ``It would bring transparency to the true cost of servicing these areas and a recognition that it is a very difficult and complex process,'' 

Telstra's legal and regulatory spokesman Martin Debelle says. Telstra's competitors, including Vodafone, Optus, AAPT and Iridium, are keen to try their luck with universal service provision, so long as the conditions are right. And that is where the negotiations and discussions begin to get sticky. Any contestability option needs to be commercially viable to grab the carriers' attention, but it also has to protect rural and remote users, who are key to the next federal elections. Then there is the issue of cost. Telstra's 1997-98 USO claim for $1.8 billion costs (later capped at $253 million) helped encourage the government to seek an alternative. But finding an alternative is no small task. The Government must decide how to determine the economic value of the USO -- and there has been plenty of discussion on that issue -- not all of it friendly. 

Some carriers are frustrated with the time taken to analyse what they regard as a Telstra ambit claim; others regard those carriers, and Telstra, as whingers who don't contribute to a solution; and yet others just think all the rest are ``opportunistic bastards who don't care about service levels''. A couple of referees have been called in, including the Australian Communications Authority (ACA).
It was asked to investigate Telstra's $1.8 billion cost claim, but in March 1999, before it could report back, legislation was introduced to cap the cost for 1997-98 at $253 million. The costs for the next two financial years were also fixed at the same price, plus inflation. The legislation is seen as an interim solution, and the Government is planning to have long-term arrangements in place for the 2000-01 financial year. The ACA's final determination on net USO costs certainly provoked discussion. It came up with two estimates for the 1998-99 and 1999-00 financial years: $280 million and $420 million, based on different assumptions. The difference between the two numbers boils down to what you regard as the relative risk of providing USOs across the country, and whether you include the cost-sharing arrangements.

If you see the 15 per cent or so that Telstra receives from the other carriers as relevant to the risk profile, the $280 million figure applies, if not, it is closer to $420 million. Carriers such as Vodafone, AAPT and Optus have publicly stated a view that their payments reduce Telstra's risk and that the USO should continue to be capped at around $250 million. Optus says it could provide a better service for $200 million.

Telstra says it is being under-funded. The ACA recognises this, providing its lowest estimate at about $30 million above the current cap, Mr Debelle says. While Telstra has in the past portrayed the USO as akin to a billion-dollar ball and chain, there are some benefits to being the USO provider that the ACA's costing models don't take into account. These include logos on payphones, value-added services sold to USO loss-making customers, and leasing arrangements with other carriers for the use of base stations. 

A Department of Communications, IT and the Arts discussion paper suggests a number of options for costing the USO, including running a competitive tender or auction, legislative or administrative determination, an economic costing model and industry agreement. The industry seems most keen on the competitive tender/auction option. The auctioning process has received much publicity lately, thanks to the multimillion-dollar prices being bid for mobile phone spectrum, but tendering has been used extensively in the past to obtain services. ``The success of any auction relies on it being an instance where demand exceeds supply,'' Horsley says. ``I can think of a number of carriers that have the capacity to provide USOs, and a number have indicated an interest publicly.''  Whatever system is used to determine the cost, it is still necessary to define the operational boundaries. Some are not expressing a preference on the detail. ``It has got to be some sort of competitive tendering because if it is left to Telstra there is no incentive to do it cheaply,'' AAPT regulatory and legal director Brian Perkins says. Most of the carriers are calling on the Government to set up a voucher system. Each eligible provider would compete to supply services to individual customers in rural and remote areas, and the winner of each customer's business would receive their subsidy. Optus and Vodafone both support this model. ``Let the consumers go out and choose, and at the end of the year each carrier requiring subsidies can receive them -- simple,'' 

Optus government and regulatory affairs manager Adam Suckling says. The option preferred by Telstra is to break up the USO into a series of regional areas, and carriers would bid for the right to provide services to every customer in the area. ``If there was more than one winner in an area the costs of supplying a service would increase because of the need for each carrier to supply its own network,'' Debelle says.
``If Telstra lost a tender for the USO, someone else would have to provide services, including back-up services. ``It would be unacceptable if Telstra had to maintain the high-cost, low-return network, with others able to cherry-pick the high-value, low-cost areas.'' But Horsley says there would not be a business case for small zones. ``You need critical mass -- a customer base -- to successfully supply services,'' he says.
He suggests one zone: all of Australia, with two carriers selected to provide services. If the services are provided at the second-lowest bidder's price and a voucher system is used to collect the subsidy, customers will be making a choice not on price, but on quality of service and extras, he says.
Many of the carriers have suggested an initial trial of any new USO arrangements before national implementation. The USO covers all 10 million or so phone lines in Australia, but only about 400,000 are classed as loss-making and therefore eligible for subsidised services, according to the ACA.
``But if all is done sensibly and according to strict specifications, perhaps there will not be a need for the USO at all in a decade,'' Horsley says.``As telecommunications costs come down, thanks to competition and technological advances, there will be less and less need for the USO. ``The break point between commercially viable customers and those needing subsidy will move substantially. ``What is fundamental is that the specifications are written so there is a genuine apples-for-apples selection process, even though you might be choosing between different technologies. ``What you don't want to do is leave out things like performance specifications. The government has to ensure that the objective of the USO is met. ``This is the supply of a standard phone service anywhere in Australia using the most efficient technology at the best price. ``The bush won't tolerate a low-grade service, and reasonably so.'' The Government is well aware of its need to protect the bush (and its election chances), as well as the need to come up with a workable solution as quickly as possible. It still has a July 1 working date. 

Meanwhile, the carriers eagerly await an announcement on potential new opportunities, and an end to discussions on just how much the USO should cost. ``We've wasted 18 months analysing Telstra's $1.8 billion ambit claim instead of concentrating on new solutions for providing the USO. That has no benefit for rural Australia, and we're still waiting,'' one representative says. ``It's time to move on,'' another says. But a decision will not come as soon as they would prefer. Because of the USO discussion paper's difficult content and the upcoming budget discussions, the issue is not likely to be put to Cabinet before April, a spokesman for Senator Alston says.
``We're certainly under some pressure to get a move on, and we will go to Cabinet as soon as we can, but we want to work through all the issues first,'' the spokesman says. However, the carriers are confident the decision will be worth the wait. It has been suggested that carriers, using a foot-in-the-door men approach may even under-bid on the USO to gain valuable customers who can then be sold additional services.

While political opinion is divided on many telecommunications issues, it appears that a Government decision to approve a competitive tender approach would receive Opposition approval and its legislation would pass through Parliament unhindered. The Opposition is on record as favouring regional tendering.

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