Sydney 1999 Conference Paper - Universal Service Excitement

Universal service excitement - The future of the universal service obligation
By Jane Forster and Caroline Lovell, Clayton Utz - Australia

Introduction

The Universal Service Obligation (USO) contained in Part 2 of the Telecommunications (Consumer Protection and Services Standard) Act 1999 (the Act) involves ensuring that all Australians, wherever they reside or carry on business, have reasonable access, on an equitable basis to:

standard telephone services
pay telephones
digital data services
prescribed carriage services(1)

Part 2 also provides for the Minister to declare specified carriers to be the universal or regional service providers or general or special digital data service providers. Such providers (USPs) are responsible for fulfilling the USO. Telstra is currently the sole USP.

Part 2 of the Act also contains a scheme for the assessment of the cost of providing the USO and for the collection, recovery and distribution of a universal service levy which shares amongst carriers the losses which result from the supply of services in the course of fulfilling the USO. The levy from each carrier is essentially a function of that carrier's proportion of the total revenue currently generated by carriers. Telstra is currently responsible for approximately 85% of the levy.

In 1993/4, Telstra's cost claim was set at $230 million indexed to the CPI for the purposes of the 1994/5, 1995/6 and 1996/7 years as a result of a compromise between Telstra, Optus and Vodafone. For 1995/6 and 1996/7 Telstra's claims averaged about $250 million. For 1997/8 a new costing method was developed by Bellcore International Inc by agreement between Telstra, Optus, Vodaphone and the ACA. On 25 September 1998, the ACA made the Net Universal Service Cost Avoidable Costs Determination 1998 which reflected the costing method developed by Bellcore.

Just a couple of days later, on 28 September 1998, Telstra filed its claim for the 1997/8 year with the Austalian Communications Authority (ACA). The total of the claim was $1.8 billion. Not surprisingly, the magnitude of this claim caused an immediate reaction from the other carriers and the Government because of its potentially negative impact on competition, investment and industry stability. Without prior warning, the claim imposed a large liability on each carrier other than Telstra.

The Government's reaction

The Government's reaction has, to date, been fourfold:

1. in April the Government called for expressions of interest in tendering for the USO from carrier;

2. in June, as an interim measure, the Telecommunications Laws Amendment (Universal Service Cap) Act 1999 was enacted which caps Telstra's claim for the 1997/1998, 1998/1999 and 1999/2000 financial years at $253.32 million;

3. also in June, the Minister requested the ACA to provide a report on what the ACA considers to be the real cost of providing the USO and what might be appropriate arrangements for the future funding of the USO. Although the ACA received submissions from Telstra, Optus, Vodafone and SETEL (Small Enterprise Telecommunications Centre Limited) and has commissioned reports to assist it from industry consultants, the ACA has not yet provided the Minister with its report(2). However, the ACA issued its preliminary assessment of Telstra's 1997-1998 claim on 30 July 1999 at $580,208,911. The ACA is yet to issue its final assessment; and

4. in August, the Minister requested the Department of Communications, Information Technology and the Arts (the Department) to review the current arrangements for funding the USO and to co-ordinate this review with the Government's current consideration of whether to introduce competitive tendering of the USO. Specifically, the Department has been asked to report on the best method for calculating the cost of the USO, who should fund the cost of delivering the USO and the scope for improvements in the administration of USO funding arrangements.

Expressions of interest in tendering for the USO

The Department issued a Consultation Paper which sought comments on the following particular issues of interest or concern for the Government:

specification of the USO services to be supplied and whether the standard telephone service and the provision of pay telephones should be the subject of separate selection processes or a combined process;

definition of a service area for which a carrier can be made the USP;

identification of the most effective competitive selection mechanism, including the criteria for selecting USPs and the possibility of a trial or pilot process

the management of transition arrangements, the duration of any contract between the Government and a USP and mechanisms for guaranteeing service delivery and quality

whether price controls and/or a ceiling on bids should be imposed.

By 28 May 1999 (the closing date for submission of comments and expressions of interest), the Department had received 31 responses, 20 of which are publicly available.

Most of the submissions, including those from the major carriers, support at least further consideration of a competitive selection process for the USO, although a small number of bodies were against the idea, for example, the Consumers' Telecommunications Network. A number of other bodies suggested that the existing controversy over the method of assessing Telstra's current claim for the cost of delivering the USO should be resolved before any substantive steps are taken.

The submissions reveal a dichotomy between the idea of competing to be selected to provide USO services and competing in the provision of USO services. There is no clearly preferred model or outcome suggested by the submissions. Interestingly, though, there seems to be a clear preference for carriers to provide USO services using their own infrastructure, rather than arrangements having to be made for the utilisation of Telstra's existing infrastructure. At most, the submissions provide a range of possible options for the Government's consideration and which are causing significant industry and public debate. One suggested model which has caused particular interest, is that proposed by Vodafone. Vodafone has suggested that:

the ACA be given responsibility for the accreditation of potential USO providers. The technology used would be a matter for the carrier

USO customers would select their preferred USO provider

each USO provider would receive a flat rate subsidy according to the number of customers served, with the ACA to determine the rate of the subsidy. At least initially, the ACA's assessment of Telstra's 1997/1998 claim would be used as the basis for this rate

additional services would attract a one-off bonus subsidy; and

there be a carrier of last resort, with Telstra being best placed to fulfil this role in return for payment of any USO subsidy not claimed by any other accredited USO provider.

The future

No doubt because of the complexity of the issues to be considered and the broad spectrum of interests involved, no date has been set for the outcome of the Government's consideration of competitive tendering or for the conclusion of the Department's review of funding arrangements.

Nevertheless, the industry is eagerly awaiting the Government's response to the expressions of interest in tendering for the USO submitted in May and to the results of the Department's review. The level of interest in providing USO services is somewhat surprising, given that carriers besides Telstra have, to date, declined to provide services in net cost areas as notwithstanding the fact that the current regime would permit them to do so. Optus has reportedly made public statements that if it were the USP it would be able to fulfil the USO for a tenth of the cost Telstra claimed for 1997/1998 using new and more efficient technologies than Telstra uses, for example wireless and satellite technologies. On 6 October 1999 Telstra released a press release stating that the tendering process would at last test the credibility of its competitors and demonstrate whether they can offer the USO at greatly reduced costs, as they have continually claimed, and at service standards equal to or better than Telstra.

For Further Information contact:
Jane Forster, Partner - Clayton Utz, Sydney

Footnote 1. Part 2 of the Act was formerly Part 7 of the Telecommunications Act 1997 (Cth) but was re-enacted in this new Act earlier this year. Digital data services were included in the obligation for the first time upon this re-enactment. There are currently no prescribed carriage services. A form of universal service obligation has been part of the Australian telecommunications regime since 1975.

Footnote 2. Gibson Quai & Associates Pty Ltd and Ovum Pty Ltd provided an April 1999 report entitled ACA USO Forward Looking Technologies and The Allen Consulting Group provided two reports - Telstra's Weighted Average Cost of Capital, Application to the USO and The Year 1 Cost Problem Application to the USO and Proposed Solution. The former report advised on technologies which would be appropriate to consider for the efficient provision of USO services. The latter report analysed elements of the Bellcore Inc costing methodology (cost of capital and depreciation issues).