1.1 On 28 June 2000, the Senate referred the
Telecommunications (Consumer Protection and Service Standards) Amendment Bill
(No. 2) 2000 to the Senate Environment, Communications, Information Technology
and the Arts Legislation Committee (Selection of Bills Committee Report No. 10
of 2000). The Committee was required to report to the Senate by 25 August
2000. The Committee sought an extension from the Senate to report on 29 August
1.2 The Telecommunications (Consumer Protection and
Service Standards) Amendment Bill (No. 2) 2000 amends Part 2 of the Telecommunications
(Consumer Protection and Service Standards) Act 1999, the part of the Act that
establishes the universal service regime for telecommunications. The universal
service obligation (USO) ensures that the standard telephone service (ie. voice
telephony), payphone and other prescribed services are reasonably accessible to
all people in Australia on an equitable basis, wherever they reside or carry on
business. The complementary digital data service obligation (DDSO) underpins
access on request to a 64kpbs (or comparable) data service.
1.3 As part of the sale of the second tranche of Telstra
in 1998, Parliament allocated $150 million (referred to as a “Social Bonus”) to
provide untimed local calls in remote Australia (the Extended Zones). In
accordance with decisions announced by the government on 23 March 2000,
the Telecommunications (Consumer Protection and Service Standards) Amendment
Act (No. 1) 2000 amends the existing universal service regime to
give the successful tenderer for the provision of untimed local calls to a
particular region, the certainty that it will become the regional universal
service provider (USP).
1.4 In his second reading speech for the earlier
legislation, the Minister indicated that a further Telecommunications (Consumer
Protection and Service Standards) Amendment Bill (No. 2) would be introduced to
implement the government’s other decisions. More substantive than the first
Act, this second Bill seeks to implement all elements of the government’s USO
package announced on 23 March 2000.
1.5 The key objectives of the Bill include:
- amending the universal service regime to improve its general
operation, particularly in relation to contestability, costing and funding;
- undertaking two pilot schemes in regional Australia to trial the
competitive supply of services under the USO; and
- extending the funding base for the USO and DDSO to include
carriage service providers as well as carriers.
The Committee’s inquiry
1.6 The Committee advertised its inquiry in each State
capital newspaper as well as in The Weekend Australian and The
Financial Review. Details of the inquiry were also placed on the
Committee’s homepage on the Internet.
1.7 The Committee received 7 submissions, 5 of which
went to the core of the issues addressed in the Bill. The list of individuals,
organisations and agencies making submissions is at Appendix 1 to this report.
All submissions received are publicly available through the Committee
1.8 The Committee held a public hearing in Canberra on
18 August 2000. The list of witnesses who appeared at the hearing is at Appendix
1.9 Most witnesses expressed broad support for the
introduction of contestability for the USO subsidy. For example, Vodafone
commented that the Bill helps to overcome a “huge hurdle ... in providing
services in rural Australia” by opening up the subsidy to competition, thereby
allowing all carriers to have “an equal opportunity” in accessing the subsidy
through provision of services in rural Australia.
1.10 Vodafone also stated that customers would be the
major beneficiaries of the changes to the legislation by having a choice of
carrier as well as a choice of technology. In Vodafone’s view, this would
result in an increase in the range of services.
1.11 Cable and Wireless Optus also supports USO
contestability for similar reasons.
1.12 The Communications, Electrical and Plumbing Union
(CEPU), however, voiced its concerns with the Bill, in particular with what it
described as a “dismantling of a very important asset for Australia, ... the
national telecommunications system”.
The CEPU commented that:
One of the things that cannot be walked away from is that this
universal service obligation is a loss service. It is a nonsense for people to
be saying that competition for a loss service will have people vying to enter
into it in the way that it is provided now.
1.13 The CEPU contended that, even if customers were
given greater variety of carriers and technologies through contestability, the
competition for loss-making services would inevitably lead to increased USO
1.14 The Department of Communications, Information
Technology and the Arts (DoCITA) stated in its evidence that there appears to
be fairly broad support for change to contestability and for the broad
direction of the legislation package. Where there are differences of view,
these tend to focus on second and third order implementation details rather
than on the broad principles.
1.15 The Department explained that the government is
introducing contestability by means of a staged approach, and hence the proposed
pilot scheme allows for flexibility for ‘fine tuning’ as the system is
implemented. The staged approach that has shaped the design of the current
arrangements relies on key principles of the primacy of consumer interests, and
ensuring that a responsible approach is taken to the costs of the USO and to
the industry as a whole.
Incentives for Telstra
1.16 A number of witnesses expressed concern that, if
Telstra were displaced as the sole USP, it would have no commercial incentive
to maintain its infrastructure over the period that it was not providing the
universal service. For example, the CEPU stated:
... [Telstra] would not be unhappy not to be the principal
provider in these loss-making areas, particularly if they can ‘cherry pick’ the
main customers in those areas. Once they were not, why would they maintain any
infrastructure in those areas? ... They would get out of there fast. They do not
want to be there now because it makes losses. As soon as someone else was the
principal universal provider they would be out of there: they couldn’t wait.
1.17 Telstra indicated in its evidence that, in the
event that it was not successful in bidding for universal service provision,
any decision on maintaining existing infrastructure would be made on a
commercial basis. Telstra commented:
There are costs of maintaining infrastructure. If we no longer
have to be there and we have sunk assets, the financial decision is somewhat
different than an ongoing responsibility to provide service there. ... It would
be almost an area by area, infrastructure by infrastructure, customer by
customer proposition for us to consider.
1.18 In its evidence to the Committee, DoCITA clarified
some issues in this regard. The Department stated that a condition of the
Extended Zone tender is that the successful tenderer will become the USP on an
ongoing basis; the tender would not be relet at the end of a three-year
period, as some witnesses appeared to assume. The Department commented that
the tender documentation makes it clear that, no matter who wins the tender,
one of the obligations they accept is that they become the Primary Universal
Service Provider (PUSP), “basically forever”.
1.19 DoCITA explained that the Minister would need to
exercise his powers to designate another carrier to be the PUSP, which is a
disallowable decision. The PUSP has no right to discontinue service for any
1.20 The Department addressed the question of Telstra’s
decision not to maintain its infrastructure if it did not win the tender by
stating that the government would accept that decision and at this stage had no
intention at all of interfering with Telstra’s opting to vacate the field.
1.21 However, DoCITA also refuted the suggestion in
Telstra’s submission that the proposed process will perpetuate a system with
USO that acts against investment in infrastructure. Instead, the Department
argued that contestability would encourage Telstra to increase its investment.
The DoCITA witness commented:
I would have thought that a system which said, ‘Here are some
incentives for people to enter the market and to start providing services’, is
in fact completely the opposite of that. There could be an argument that at
least under the current system Telstra provides services in a particular year
and at the end of the year they get paid a lump sum of money irrespective of
the level or standards at which they provide the services. If the level and
standard get covered off in regulation, there is very little incentive for
Telstra to invest at the moment. ... I would have thought that a system that has
got an incentives-based approach to things, where you actually have to try to
get customers and retain customers and focus on customers if you want to get
the universal service money, is much more likely to generate investment and
focus on consumers, which is one reason why the government has, I suppose, gone
down this path.
1.22 A number of witnesses raised the issue of cost
barriers that are to be overcome in providing services to rural Australia, which
are more expensive than service provision in metropolitan Australia. The CEPU,
in particular, voiced concern that competitive tendering would bring no savings
to the community, but would likely lead to increases in the total costs borne
1.23 Vodafone acknowledged the cost barrier as an issue,
but regarded this as an opportunity to work on economies of scope. In
particular, Vodafone believes that, for the same order of magnitude of capital
outlay, its revenue would increase quite significantly through economies of
scope by being able to bundle a mobile service with a standard telephone
1.24 Cable and Wireless Optus, however, expressed some
concern that the current approach to USO contestability will not work in
practice, as new entrants will be reluctant to enter and unlikely to compete in
USO areas. Cable and Wireless Optus believes that the costing model will
overcompensate Telstra for the risk and stranded assets which in turn will
drive up the USO costs in pilot areas. Such costs will impact back on the
industry, driving up costs generally. Therefore, Optus submits, USO costs will
increase as contestability is introduced, rather than decrease, and benefits to
consumers will not be delivered.
1.25 Telstra also expressed difficulties with costing of
the USO, commenting that the obligation should properly be viewed as a tax on
industry. For this reason, costing and funding arrangements are important in
determining the size and incidence of that tax. In this context, Telstra is
critical of the costing process as envisaged by the legislation, claiming that
there has not been a year since 1991 that the process has worked. Telstra
Costs do not disappear because the legislation says you do not
recognise them. It merely meant that Telstra had to pay the unrecognised
amount – 100 per cent of that tax – and everybody else contributed a share of
the recognised amount. That is, if you like, the history. Going forward,
there is not even a cost concept in this Bill, and to us that is
extraordinary. We have a requirement on Telstra, at least in the near term, to
be the carrier of last resort of the primary universal service provider
throughout Australia, and yet any concept of cost recovery does not exist in
the legislation ... We would like the legislation to reflect that the supplier of
a universal service does receive the costs of supply.
1.26 Other carriers who gave evidence opposed the
payment of a premium subsidy to Telstra as carrier of last resort. Vodafone
described the position in this regard as the level of risk and exposure that a
carrier has in providing services in rural Australia. In Vodafone’s
submission, the risk to Telstra of losing customers and incurring economic loss
as a consequence is potentially less than the cost to Vodafone. Vodafone
envisages a high level of retention by Telstra of customers in rural areas and
estimates its risk in winning customers from Telstra to be at least equal to
Telstra’s risk in retaining its customers.
1.27 Therefore, Vodafone argues that for Telstra to
receive a premium on top of what a competing USP receives is “just funding
inefficiency within Telstra”.
In its view, that premium could act as a disincentive as it would make it
harder for Vodafone to compete.
1.28 Cable and Wireless Optus similarly contends that
the premium payments to Telstra are unnecessary as they only increase the cost
of the USO. Optus does not believe that Telstra needs to be the carrier of
last resort or the PUSP, and is prepared to undertake that role for no
1.29 On this issue, DoCITA indicated in its evidence
that it is examining ways of improving the machinery of the legislation to
overcome the sorts of problems with payments raised by Telstra.
1.30 Telstra expressed particular concern that the entry
of competing USPs into the field opens up opportunities for forms of
competitive distortion, such as arbitrage.
Telstra supplies local call resale at a nationally averaged rate, by
regulation. Price controls require it to nationally average its untimed local
call price. Telstra’s concern is that a competitor with no infrastructure
could use that nationally averaged price and supply universal services through
resale, thereby collecting a subsidy as if they were providing infrastructure
to an area yet merely reselling Telstra’s service that Telstra could be
supplying at below cost.
1.31 To remedy this situation, Telstra suggests that a
USP that relies on resale should not receive a USO subsidy. Further, Telstra
proposes that the ACA and the Australian Competition and Consumer Commission
(ACCC) align their approaches to network costing in USO areas to avoid any
effect on competition in contestable areas that would arise from costing
1.32 DoCITA does not share Telstra’s concern that
competing service providers would try to build their entire business based on
reselling Telstra’s network, describing the likelihood of this as “extremely
The Department believes that building a business based purely on arbitrage,
particularly in regional areas, would be a “very difficult business ... to
Such a business would need to rely on an agreement with Telstra on access and
interconnection for use of Telstra’s facilities. In the event of arbitrage,
DoCITA argues that Telstra would approach the ACCC immediately to have the
access arrangements varied. The Department commented:
Telstra take the view in their submission that, because they
have nationally averaged rates for doing things, somebody else will come along
with a nationally averaged rate and try to take advantage of that to build a
business. I would not want to prejudge the ACCC’s views on this, but if there
were a dispute about that access and interconnection agreement in terms of
conditions, that it would be in the long-term interests of end users. Telstra
would probably have quite a strong case to say that, in this case – where there
are universal service subsidy arrangements applying and this person is clearly
just trying to use the system to build an arbitrage business – it is not in the
long-term interest of end users. Telstra could probably go to the Commission
to seek to have that varied.
I think that the very fact that Telstra could do that would act
to discourage people from coming in to try to build a business solely or
largely on the basis of arbitrage. ... The ACA would have to look at any
arrangement like that to make sure it was fair to consumers.
1.33 Vodafone, in particular, welcomes the trial scheme
in pilot areas provided by the Bill. The pilots would enable Vodafone to trial
innovative packages in rural areas which would provide the carrier with
statistical and other information to test its belief that some customers may
prefer a mobile service over an untimed local option. Vodafone regards the
pilot scheme as presenting only limited risk to the government with the
consumer as the beneficiary due to the option of moving to an alternative
service if that meets the particular needs of customers.
1.34 Cable and Wireless Optus suggested that the first
pilot should be introduced in areas close to where providers have existing
infrastructure, to attract new providers to enter the market.
1.35 Telstra supports the trial as potentially
informative of technical capabilities; the costs of service delivery; and the
willingness of customers to accept price and quality trade-offs.
1.36 However, Telstra cautions that Parliament needs to
have feedback on whether the contestability pilots have been successful or not
in order to decide on the Minister’s proposal for areas where contestability
will be introduced.
1.37 The CEPU raises a similar concern about legislative
ambit in the Bill when entering into the post-trial environment. The Union
... [W]e believe that these trials need to be viewed with a great
deal of scepticism and caution. As a minimum, there needs to be provision in
the legislation itself – not just a policy statement by government, but
provision in the legislation – for a review of their outcomes – we would
suggest within a three-year time period of them having started – and that the
Minister ... should not be able to proceed to declare any other new areas
contestable until that review has been conducted, a report tabled in the
Parliament and the subject of full debate.
1.38 DoCITA indicated in its evidence that the Bill
takes a holistic approach to the trials scheme and continuing implementation of
the contestability model. The Department stated:
Basically, what the Bill does is set up a framework for introducing
contestability over time. It does not specifically identify: here are the
pilots and here are later stages of the process. The government has made
announcements that it proposes to start these two pilot areas but the Bill in
fact does not make the distinction between pilot areas and other areas. ... We
would take the view that all of the provisions of the Bill are required both to
do the pilots and for the ongoing arrangements. ... Effectively what the Bill
does is establish an overall system. It says: here are the overall
arrangements; here is a default contestability scheme.
1.39 DoCITA advised that there are no formal
arrangements in the Bill to conduct a review process at the conclusion of the
trial period. The Department is proposing to monitor the pilots by means of
administrative arrangements. While the details of these arrangements have yet
to be finalised, DoCITA provided the following comments with the regard to the
In very broad terms, [the criteria] are going to be issues like:
how administrable are they going to be; how are the administrative arrangements
working; how effective have we been in getting competition to come in; what do
the costs in broad terms look like and how have the costing arrangements
worked; how do things look from the consumer perspective; and in particular
what is the level of consumer understanding about the process. Effectively, we
will look at how workable have the arrangements actually been and how
successful have they been both in ensuring that we continue to have the
universal service provided in an effective way and also in increasing choice
for consumers at the same time.
Discretionary Ministerial powers
1.40 Telstra, in particular, was concerned at the wide
discretionary powers given to the Minister and the ACA in the legislation, with
no reference to matters to be considered or evaluated in making a particular
1.41 DoCITA indicated that many of these issues are
being addressed, explaining that the government intends to move some amendments
to the Bill in the Senate:
... [T]he government will be moving some amendments to the Bill.
Those amendments will be covering off matters such as consequentials and
transitionals. Currently there are not any consequential provisions and
transitional provisions between the old regime and the current one.
We will also be incorporating all of the amendments that were
made by the Senate in relation to Universal Service Bill (No. 1) so that the
Bill reflects and incorporates those issues that the Senate had a view on last
time. We will probably be including some further provisions with some further
penalties. There is a penalty regime built into the current Bill in the sense
that everything in the Act is a licence condition and so carriers are required
to comply that way. We will also be incorporating some specific penalty
provisions in relation to certain aspects of the legislation. One other
matter, which we will probably be incorporating as amendments, is that during
the drafting process there were a couple of oversights. A couple of
Ministerial or ACA determinations which were not disallowable which probably
should have been, and they will be incorporated in those amendments as well.
1.42 The CEPU raised its concern that the ATSs do not
appear to be necessarily subject to any regulatory price controls. The Union
It is not clear whether they will be subject, for instance, to
customer service guarantee provisions or where they will sit in relation to the
customer service guarantee. For instance, these services may be mobile
services which are not at present captured by the customer service guarantee ...
Particularly in the area of pricing, we never tire of saying that the USO is
not really a function of costs, it is the subject of prices, because if the USO
provider were free to charge any price ... for the services offered, there would
be no reason not to charge at least at a recovery level and there would not be
a loss and there would be nothing to be funded. So if a provider can offer
alternative telecommunications services in lieu of the USO and still be
subsidised or given some sort of payment for doing it, it opens up the
possibility of their charging perhaps more for a certain service than is
currently the regulated price under the price capping regime, or at least
alternatively trading off service quality against price and so squeezing more
out of the service offering.
1.43 In this context, Telstra raised the issue of a
competing USP delivering an alternative service at a higher or lower level of
quality than the standard service that the PUSP is obliged to deliver. In
Telstra’s view, this could result in a situation where carriers delivering
different services at different cost structures with different levels of
features all receive the same level of subsidy.
1.44 DoCITA clarified in its evidence that the Bill
allows for the possibility of a primary universal service provider being able
not only to supply the standard telephone services as defined in the
legislation but in addition – without derogating from its obligation to supply
that standard of service – provide alternative telecommunications services.
The standard of those alternative services would be a matter for the provider
to submit to the ACA and for the authority to take account of in deciding
whether to approve that service.
1.45 The Department commented that the Bill specifies a
process for the ACA to consider proposals for ATSs by comparing services
currently available in the marketplace and assessing the basic requirements of
consumers. The additional services have to meet the fundamental requirements
of the USO, including provision of the standard telephone service, which in
turn requires voice telephony. The ACA would also have regard to technical
standards applying to provision of the standard telephone services in respect
of matters such as noise, delay, and data rates.
1.46 DoCITA stated further that the Bill (at clause
13Q(2)) requires the core providers to submit a marketing plan for their ATS
with certain mandatory specifications. The Department commented:
The ACA, for example, make judgments about to what extent they
think the ATS will be able to meet the universal service obligation for the
area concerned, that those services are of general appeal and appropriate for
filling the obligation, that they set out appropriate terms and conditions on
which the equipment, goods and services are to be supplied, that they set out
appropriate arrangements for the marketing of those services to people – in
other words that consumers are informed about the services, and that there are
appropriate procedures in place effectively about the supply of those and for
Public health and safety
1.47 One submission, from the Maleny Residents’ Action
Group (Submission No. 7), alluded to public health and safety concerns that it
has raised with Telstra in relation to a mobile telephone base in the township
of Maleny in Queensland. The submission expressed concern that digital
technology may hold potential risks for public health and safety that have yet
to be subject to independent scrutiny and research to assess any possible short
and long-term impacts.
The Committee notes the submission’s comments but they are more relevant to the
Senate Environment, Communications, Information Technology and the Arts
References Committee’s current inquiry into Electro-Magnetic Radiation.
1.48 Having considered the Bill and the issues raised in
submissions received and in evidence at hearing, the Committee makes the
The committee recommends that the Bill be passed.
Senator Alan Eggleston
Chair (LP, WA)
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