The Telecommunications Universal Service Obligation (USO)

E-Brief: Online Only issued 26 September 2000

Dr Kim Jackson, Analysis and Policy
Social Policy Group

Introduction

This brief describes recent policy developments concerning the telecommunications Universal Service Obligation (USO) and provides access to documents, legislation and Internet sites dealing with the subject and related issues.

Section 9 of the Telecommunications (Consumer Protection and Service Standards) Act 1999 states that the object of the USO is to ensure that:

the standard telephone service; and
payphones; and
prescribed carriage services; and
digital data services

are reasonably accessible to all Australians on an equitable basis, wherever they reside or carry on business. The section also states that the USO should be fulfilled as economically as possible and that any losses involved in its provision should be shared among carriers.

The Act gives the Minister the power to designate a universal service provider with primary responsibility for delivery of the USO. Telstra is the current universal service provider, although the legislation allows the Minister to declare two or more carriers as universal service providers, or regional service providers, with appropriately limited responsibilities.

Recent Legislative Changes

The Telecommunications (Consumer Protection and Service Standards) Act 1999 restated in a single Act the range of safeguards for telecommunications consumers that were contained in the Telecommunications Act 1997 and the Telstra Corporation Act 1991. These safeguards include:

The Universal Service regime;
The National Relay Service (this provides the deaf or hearing impaired with access to a standard telephone service). In June 1998 it was announced that the contract for provision of the National Relay Service was awarded to the Australian Communication Exchange (ACE). Information on the Service is available from the ACE web site.
The Customer Service Guarantee (CSG). The CSG was introduced by the Telstra (Dilution of Public Ownership) Act 1996 as an additional safeguard for consumers. The CSG provisions were re-enacted in the Telecommunications Act 1997 and essentially provide for the Australian Communications Authority (ACA) to determine performance standards for carriers. These standards relate to such matters as connection and fault rectification times and the keeping of appointments with customers. If a carrier fails to meet a standard then it is liable to pay compensation to the customer in accordance with a scale determined by the ACA. Further information is available from this ACA site.
The Telecommunications Industry Ombudsman (TIO) scheme. This requires providers to enter into a scheme which allows the TIO to investigate and make determinations about complaints by consumers.
The price control arrangements for Telstra and continued access to untimed local calls.

The Telecommunications Legislation Amendment Act 1999 repealed the provisions of the Telecommunications Act 1997 and the Telstra Corporation Act 1991 that were re-enacted in the Telecommunications (Consumer Protection and Service Standards) Act 1999. It also contained provisions to promote competition in the telecommunications sector and to require the Australian Competition and Consumer Commission (ACCC) to monitor and report on telecommunications charges and Telstra's compliance with price control arrangements.

Further information on the role of the Commission is available from this ACCC page.

The Telecommunications (Universal Service Levy) Amendment Act 1999 and the NRS Levy Imposition Amendment Act 1999 contained amendments consequential upon the shifting of the USO and National Relay Service to the new Act.

On the 10 May 2000 the Government introduced the Telecommunications (Consumer Protection and Service Standards Act) Amendment Bill (No.1) 2000 to enable the Minister to determine a universal service provider's net universal service cost (NUSC) for up to three years in advance, and to give carriers some certainty about the universal service regime that would apply if they won the tender to extend access to untimed local calls in remote Australia. The Bill was the subject of a Report by the Senate Environment, Communications, Information Technology and the Arts Legislation Committee. The Bill was passed, with the House agreeing to Senate amendments relating to the level of ministerial discretion and the compulsory information requirements.

On the 29 June 2000 the Government introduced the Telecommunications (Consumer Protection and Service Standards) Amendment Bill (No.2) 2000 and the Telecommunications (Universal Service Levy) Amendment Bill 2000 to implement policy decisions announced on the 23 March 2000. See this section for more details of these decisions.

Costing the USO

Funding for the USO is based on the net universal service cost (NUSC) for a financial year. Telstra is required to submit a claim to the ACA for the NUSC on the basis of a formula of 'avoidable cost minus revenue foregone'. This is equivalent to Telstra's operating and capital costs (including the opportunity cost of capital) for the loss-making services, less any revenue it may have received for those services.

Following a lack of agreement between the carriers concerning Telstra's NUSC claim for 1993-94 a new costing model was developed by Bellcore International and accepted by the carriers (Telstra, Optus and Vodaphone) and approved by the ACA in October 1998. For 1993-94 a negotiated amount ($230 million) was agreed to by the carriers. For 1994-95 to 1996-97 the NUSC was derived from the 1993-94 figure with adjustments for inflation. Using the new model, Telstra submitted a claim to the ACA for a 1997-98 NUSC of $1828 million, compared to the previous year's cost of $252 million.

In October 1998 the Minister issued a press release indicating that the 1997-98 NUSC would be subject to the agreement of the carriers and failing this, would be capped by legislation. This action was taken "in order to provide the industry with the necessary degree of certainty" while the ACA examined the Telstra claim. The Minister also requested the ACA to review USO costing and assessment arrangements with particular reference to:

the impact of the 1997-98 USO assessment on competition in the industry;
the most appropriate method for calculating the NUSC in future; and
the appropriateness of the NUSC model.

In February 1999 Optus claimed that it could reduce the cost of the USO to $178 million by using satellite technology to deliver the standard telephone service. However, it declined to confirm that it would tender for the USO on this basis if given the opportunity. In April 1999 the ACA released the final versions of two consultants reports which recommended using input values that would reduce Telstra's NUSC claim to $600 million.

The Telecommunications Laws Amendment (Universal Service Cap) Act 1999 received Royal Assent in June 1999. It fixed the cost of the NUSC at $253 million for 1997-98 and the two following years (with allowance for inflation). However, the legislation also gave the Minister the power to determine different amounts for 1998-99 and 1999-2000 if circumstances changed. Such determinations would be disallowable instruments. This legislation was the subject of a report by the Senate Environment, Communications, Information Technology and the Arts Legislation Committee, which can be obtained from this Senate page.

On 22 October 1999 the ACA released its final assessment of the 1997-98 NUSC at $548 million. This was the amount that would have applied in the absence of the cap. The significant difference between the amount claimed by Telstra and the final assessed amount was mainly due to the ACA's view that the USO would be most efficiently supplied using a mixture of cable, terrestrial radio and satellite technologies. In comparison, Telstra used only cable and one radio solution in its claim. Adjustments were also made to other values in Telstra’s claim, principally to the opportunity cost of capital, switching and operating costs. The NUSC amount is highly sensitive to such adjustments, as minor changes in these values will significantly vary the NUSC amount.

In November 1999 the Minister requested the ACA to provide advice on factors relevant to estimating the NUSC for 1998-99 and 1999-2000. The ACA reported in January 2000, and on the 23 March 2000 the Government announced that the NUSC for 1998-99 and 1999-2000 would be increased to around $280 million in line with the advice from the ACA. The ACA's estimates took into consideration the impact of the USO funding mechanism. Without this, the NUSC estimate would be around $120 million higher.

USO Funding Review

On the 20 August 1999 the Minister released a discussion paper and called for public submissions to a review of the arrangements for funding the USO from the year 2000-01. The Minister stated that the uncertainty generated by the Telstra claim illustrated the need for arrangements that provide greater certainty about funding requirements. The review is also intended to ensure that future funding arrangements are compatible with any changes to the way that the USO is delivered, including by tendering. The review will be conducted by the Department of Communication, Information Technology and the Arts (DCITA), which will report on the following matters:

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.

Thirteen submissions were received in relation to the review. These can be obtained from this DCITA page.

Tendering the USO

In April 1999 the Minister released a public consultation paper and invited telecommunications carriers to express interest in tendering for universal service obligations. While it was stressed that this invitation did not represent a commitment to establish a competitive selection process of any particular sort, the government has pointed to the potential benefits of competitive selection, including:

containing the USO cost;
transparency and certainty in USO requirements and costing;
improving USO performance and compliance;
encouraging new entrants to service regional areas.

The Minister stated that the Government believed that carriers other than Telstra may be able to deliver a more competitive and efficient USO through use of satellite or wireless local loop technologies.

On the 23 March 2000 the Government announced a number of significant policy decisions concerning the USO. These included the introduction of competition in the delivery of the USO. This would first take the form of two regional contestability pilots, to be finalised following consultation with the States, Territories and stakeholders. On the 23 August 2000 the Government announced the areas to be covered by the contestability pilots. These were:

the Greater Green Triangle of south-west Victoria and south-east South Australia, expanded to include the Central Goldfields and Greater Bendigo; and
north-east New South Wales and the Queensland Downs, stretching from Kempsey in New South Wales, inland, to Caloundra Shire in Queensland.

The Government also stated that arrangements for the two pilots should be in place by the end of 2000, with competing universal service providers able to seek approval from that time.

On the 10 May 2000 the Government introduced the Telecommunications (Consumer Protection and Service Standards Act) Amendment Bill (No.1) 2000. The legislation included provisions to give carriers some certainty about the universal service regime that would apply if they won the tender to extend access to untimed local calls in remote Australia. This measure is part of the 'social bonus' from the partial privatisation of Telstra. The Bill was the subject of a Report by the Senate Environment, Communications, Information Technology and the Arts Legislation Committee. The Bill was passed, with the House agreeing to some Senate amendments.

An extensive range of material concerning the untimed local calls tender can be obtained from this DCITA page, including information briefs, media releases, a consultant's report and a fact sheet.

On the 29 June 2000 the Government introduced the Telecommunications (Consumer Protection and Service Standards) Amendment Bill (No.2) 2000 and the Telecommunications (Universal Service Levy) Amendment Bill 2000. This legislation would enable the introduction of competition in the provision of the USO.

The Communications Law Centre has published a research paper, Tendering for Universal Service Provision by Rodney Maddock. This paper was commissioned as part of the research project ‘Mapping Future Directions for Communications in Rural and Regional Australia’ being undertaken by the Communications Law Centre in collaboration Optus Communications Pty Limited and the National Farmers’ Federation under the Australian Research Council’s ‘Strategic Partnerships with Industry - Research and Training’ program.

Other papers on this subject that are available on the Internet include:

Steven McElhinney, Who wants it? Tendering the Universal Service Obligation
Jane Forster and Caroline Lovell, The Future of the Australian Universal Service Obligation

Both of these papers were presented at the Communications Research Forum of September 1999 organised by DCITA.

The Universal Service Plan

Section 27 of the Telecommunications (Consumer Protection and Service Standards) Act 1999 requires a universal service provider to lodge a Universal Service Plan (USP) outlining how it intends to fulfil the USO. Each plan must be approved by the Minister. Under section 39 the universal service provider must take all reasonable steps to ensure that the Plan is complied with, although the Act does not provide for penalties for non-compliance.

A copy of Telstra's Universal Service Plan can be obtained from this page.

Although Telstra's USP was approved in May 1998, the Minister also indicated that the ACA would conduct a review of the Plan. This review was released in March 1999. It recommended:

the amendment of the USP to require the provider to offer interim phone services by satellite where appropriate;
updating of the USP to reflect current arrangements for the provision of equipment to people with disabilities;
that the USP contain more specific targets for the provision of payphones, a three day objective for repairs to remote telephone services and a commitment to a monitoring and reporting regime.

A copy of the review can be obtained here.

Digital Data and the USO

In April 1998 the Minister directed the ACA to inquire into whether a digital data capability should be incorporated into the USO as a prescribed carriage service. The ACA reported to the Minister in August 1998. Its major conclusions were that:

making Integrated Services Digital Network (ISDN) available on demand to 100 per cent of the population would be prohibitively expensive;
a combination of ISDN to 96 per cent of the population and an asymmetrical 64 kilobits per second (kbps) satellite service to the remaining 4 per cent would provide a digital data capability at minimal additional cost;
the lack of ISP points-of-presence in many rural and remote areas significantly affected the price of Internet access in those areas.

In April 1999 the Government announced that it would amend the USO to provide that a digital data service of at least 64 kbps is available to all Australians. For the 4 per cent not receiving a 64 kbps ISDN service on demand, a broadly comparable satellite service would be provided. Consumers would be reimbursed 50 per cent of the cost of the necessary satellite receiving equipment. This subsidy would be funded by the telecommunications industry as part of modified universal service levy arrangements.

The Government introduced amendments to the Telecommunications (Consumer Protection and Service Standards) Bill 1998 and the Telecommunications (Universal Service Levy) Amendment Bill 1998 then before the Senate to give effect to these decisions from 1 July 1999.

Partial Privatisation of Telstra

Although the partial privatisation of Telstra has not altered its responsibilities with regard to the USO, a number of measures associated with the sale of an additional 16.6 per cent of Telstra (up to 49.9 per cent) have social implications. The Telstra (Further Dilution of Public Ownership) Act 1999 provided for the additional sale. It also required Telstra to ensure that at least two of its directors have experience in the communications needs of regional areas and that $250 million from the sale be allocated to the National Heritage Trust of Australia Reserve. The legislation also provided for a "social bonus" from the proceeds of the further sale. The elements of the social bonus are as follows:

rural transaction centres ($70 million over 5 years);

extended access to untimed local calls ($150 million over 3 years);

meeting the telecommunications needs of people in remote island communities, isolated island communities or the Australian Antarctic Territory ($20 million over 3 years);

Internet access for people in rural or regional areas ($36 million over 3 years);

mobile phone coverage along highways ($25 million over 3 years);

a Television Fund to enable improved television reception, to extend coverage of SBS television, and to support a New Media Unit to be established within the SBS ($120 million over 5 years).

There is an extensive range of material on the social bonus available from this DCITA page.

Telecommunications Service Inquiries

The ACA is required to monitor and report each year to the Minister on all significant matters relating to the performance of telecommunications carriers. The Telecommunications Performance Report 1998-99 is the most recent of these reports. It contains chapters on the Customer Service Guarantee, the USO, industry codes and standards, and many other matters. The Commission also publishes quarterly Performance Monitoring Bulletins on quality of service issues in the telecommunications industry and Special Reports on various subjects. Special Report No.5 (March 2000) The Universal Service Obligation - Payphones examined Telstra's payphone service and concluded that there were grounds for concern with the carrier's performance.

In September 1999 the ACA began an investigation into Telstra's performance under the Customer Service Guarantee and the USO. This was prompted by Telstra's poor performance in connecting new services for certain customers. The report identified a number of factors responsible for this performance, including:

inadequate infrastructure;
deficient records; and
poor work practices and procedures.

The ACA will monitor Telstra to determine if remedial actions have been effective and performance has improved. A media release on the subject and the report itself are available from this page.

On 19 March 2000 the Minister announced the establishment of an independent inquiry to assess the adequacy of telecommunications services. This was in line with an election policy commitment to have such an inquiry before any further privatisation of Telstra beyond the current 49 per cent. The inquiry was chaired by Mr Tim Besley AO, and reported on 30 September 2000. The report and related documents can be obtained from this page. The Minister has also issued a press release containing a summary of the report's recommendations.

The Australian Competition and Consumer Commission is required to monitor and report on prices paid by consumers for telecommunications services. In April 2000 it published Telecommunications charges in Australia 1995-99. A press release on the report is also available.

March 2000 USO Policy Statement

On the 23 March 2000 the Government announced a number of significant policy decisions concerning the USO. These included:

the introduction of competition in the delivery of the USO. This would first take the form of two regional contestability pilots, to be finalised in June 2000 following consultation with the States, Territories and stakeholders. Telstra will be required to continue to operate in the pilot markets, but would be compensated for its increased commercial risk. This means that no consumer will be forced to give up their Telstra service unless they choose to move to a new service provider.
The responsibility for paying for the USO to be extended to include carriers and service providers who earn more than a prescribed amount.
An increase in the NUSC for 1998-99 and 1999-2000 to around $280 million p.a. (see section on 'Costing the USO' above).
The USO to be costed in advance for a period of up to three years, with the ACA to begin work immediately on costings for forward years.

On the 23 August 2000 the Government announced the areas to be covered by the regional contestability pilots. These were:

the Greater Green Triangle of south-west Victoria and south-east South Australia, expanded to include the Central Goldfields and Greater Bendigo; and
north-east New South Wales and the Queensland Downs, stretching from Kempsey in New South Wales, inland, to Caloundra Shire in Queensland.

For copyright reasons some linked items are only available to Members of Parliament.

The Telecommunications Universal Service Obligation (USO)