Key takeaways

• The Government has proposed to retain its existing Universal Service Obligation (USO) contract with Telstra “for the immediate future”, despite foreshadowing last year that it would be scrapped by 2020
• The proposal reflects a continuation of the status quo for Telstra, which will be required to maintain its copper network in regional Australia to support the provision of voice services 
• The proposal reflects growing concerns regarding the reliability and capacity of nbn co’s fixed wireless and satellite networks to deliver fast broadband services to rural and regional Australians to be an appropriate substitute for Telstra’s copper network.  The Government has cautioned against the potential impacts of moving away from Telstra’s “proven and trustworthy” copper network without proven alternatives.
• The cost to nbn co of migrating customers off Telstra’s copper network has been placed on hold
• The proposal raises the prospect of industry funding two different universal service providers in the short term, with Telstra retaining obligations as the universal service provider for fixed voice services and payphones while nbn co becomes the universal service provider for broadband services as the nbn rolls out.  This leaves open the question of how the Telecommunications Industry Levy will interact with the Regional Broadband Scheme and nbn co’s obligations as the universal service provider for broadband services under the statutory infrastructure provider legislation currently before Parliament. 

Summary 

One year after announcing that the Government would replace the USO contract with Telstra with a modernised Universal Service Guarantee (USG) by 2020, guaranteeing access to broadband as well as voice services, Communications Minister Mitch Fifield has released a summary report outlining the Government’s proposals for delivery of the scheme. Despite calls for widespread reform of the USO to reflect “evolving policy, market and technological realities”¹,  the government has concluded that current USO arrangements should be retained for the immediate future, with broadband services to be delivered primarily under the NBN.

Criticism of the USO

Under the USO arrangements, Telstra is contracted until 2032 to provide fixed voice services on reasonable request, supply and maintain payphones, and maintain existing copper connections outside the NBN fixed footprint. The USO is funded by the Commonwealth, as well as by a levy on industry via the Telecommunications Industry Levy.
However, this arrangement has been subject to recent criticism, both in respect of the costs of funding the USO and concerns that a requirement to provide fixed voice services over copper and payphones is now largely redundant given the emergence of alternative wireless and broadband solutions. The Productivity Commission (PC) concluded in April 2017 that the USO was “anachronistic and costly”, and “difficult to justify” in light of the “lack of transparency and accountability” of the arrangement. The PC highlighted that 99% of premises have access to mobile phone networks or broadband, rendering fixed-line copper connections and pay-phones increasingly redundant. The Australian National Audit Office further found that key aspects of the USO contract “do not reflect value for money principles”, and that there was a lack of evidence that the USO had brought a net public benefit. 
In light of these concerns, the PC recommended that the USO be wound up by 2020, in time for the NBN rollout. By then, the PC suggested, the government would be able to leverage off the National Broadband Network (NBN) and mobile networks to meet minimum standards for universal service delivery. Any availability, accessibility or affordability gaps could then be the subject of targeted intervention, which (importantly) would be subject to transparent costing and competitive tendering where possible.² 

The Government’s Response

The Government acknowledged these criticisms in its Summary Report on the Development of the Universal Service Guarantee, but has recommended retaining the USO for voice services and payphones “for the immediate future”.
According to the Summary Report, high-level costings indicated that voice services could be delivered in the most cost-effective manner by a combination of wireless (fixed or mobile) and satellite technologies. However, to maximise these savings, it was considered that approximately 235,000 ADSL broadband services on Telstra’s copper network would need to be migrated to alternative platforms. The report notes that nbn co designed its fixed wireless and satellite networks on the assumption that Telstra would continue to provide these services using ADSL and that nbn co would need to invest in additional capacity to service these customers.  The Report concluded that the cost of this migration (including the necessary investment by nbn co to provide services to these customers) would “outweigh any estimated savings or efficiency gains from reform”.³
The government also emphasised concerns from regional, rural and remote stakeholders about the need for reliable and high-quality voice services. It warned against the potential impacts of moving away from Telstra’s “proven and trustworthy” copper network in the absence of proven alternatives.⁴  
While the government has acknowledged it is unclear whether Telstra would want to continue its obligations to maintain copper connections past 2032, the Report is vague on a timeline for transitioning customers from this infrastructure. Legislation currently before Parliament would see NBN Co become the default 'infrastructure provider of last resort', requiring non-nbn carriers to support the funding of fixed wireless broadband and satellite broadband across Australia.  This suggests that nbn co will ultimately be tasked with providing voice services to these customers as well, casting a question as to whether the migration costs will eventually need to be met and are simply being kicked down the road. The Report means Telstra’s role under the USO will continue unchanged for now, calling into question the relationship between the USO levy and proposed regional broadband scheme. 

 ¹Productivity Commission Report p 2
² https://www.pc.gov.au/news-media/pc-news/pc-news-august-2017/telecommuni...
³p 23
⁴p 21, 23