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Wednesday, 8 February 2012
Page: 201


Mr FLETCHER (Bradfield) (09:24): I rise to speak on the Telecommunications Legislation Amendment (Universal Service Reform) Bill 2011 and related bills. Universal service obligation has been a quagmire of confused policy for 20 years. In my former life as a senior executive of Optus, I spoke about the issue so often that people in Canberra would joke that USO stands for 'Usual Submission from Optus'. Now I bring a different perspective to bear as a legislator concerned about achieving the most efficient and lowest cost arrangements to deliver broadband and telecommunication services to as many people as possible.

With that perspective, I make three points: firstly, the current USO arrangements are not well understood and are seriously flawed; secondly, the new arrangements set out in this bill are an expensive sham which do not advance the position at all and waste a lot of money; and, thirdly, there would be better ways forward which this government could have proposed if it was serious about reform.

I turn firstly to the argument that the current arrangements are not well understood and are seriously flawed. The universal service obligation in its present form was introduced in the early 1990s in advance of Telstra being exposed to competition. The unions were very concerned at the time that Telstra would lose profitable customers to new entrants and would be left serving customers in less profitable areas. Therefore, the current structure of the universal service obligation was introduced, requiring Telstra's competitors to cross-subsidise it for loss-making services, particularly in non-metropolitan Australia. It was specifically designed to be a way to try to mitigate the effect of competition on the incumbent monopolist.

In fact, the fear the unions held never really materialised because Telstra made ruthless use of its vertical integration and incumbent advantages. Even so, the USO was baked into the legislative arrangements and a cabal of cardigan wearers in the Australian Communications Authority, later the Australian Communications and Media Authority, set about the ponderous and regular task of assessing Telstra's so-called net universal service cost—that is, the amount it purportedly loses in providing universal service—and then allocating that cost across industry participants. The cost modelling used by the Australian Communications and Media Authority is intensely controversial. It does not take account of the advantages which Telstra enjoys as the result of being the universal service provider and as the result of being the incumbent, including its economies of scale and scope and, of course, the brand benefits which come from being seen as the ubiquitous provider of telecommunication services.

The government asserts that the report it obtained last year from its consultants, Castalia, gives what has previously been lacking in this debate: an objective estimate of the cost to Telstra of the universal service obligation. I am sorry to say that the report does no such thing. It is riddled with blank spots where key data has been withheld on the grounds that it is commercial-in-confidence. There has been little opportunity for third parties to test the data and assumptions in that report and the report fails to take account of the benefits, which I have already mentioned, which Telstra receives from being the ubiquitous operator. These benefits have been recognised by telecommunications regulators in many other countries.

Telstra's obligations under the universal service obligation are quite narrowly and specifically defined. It is required to provide the so-called 'standard telephone service'—that is, a voice telephony service. As we have heard, the USO also covers pay phones—and there are some other elements such as the National Relay Service—but I want to confine my comments to the question of services received by individual premises. Telstra, under the current arrangements, is required to provide this service for a standard connection charge, which is set under the price cap regulations. In addition, the ongoing price it charges for providing this service—that is, monthly line rental and other cost components—must not exceed the amount set under the price cap regulations.

The true economic cost which Telstra incurs is the capital cost of building a connection to a customer, typically in remote or rural Australia, which it might choose not to serve if it did not have a regulatory obligation to do so. That cost can sometimes be very substantial. But once the connection is built, the incremental cost of providing the service is very low indeed, consistent with the normal principles of telecommunications economics. It is very hard to see the economic logic for calculating the ongoing loss incurred in providing the service and making this the basis for a cross-subsidy.

I want to now turn to the argument that the arrangements set out in this bill are an expensive sham which do not advance the position and which waste a lot of money. According to the explanatory memorandum:

... it is appropriate that the model for delivering universal service and other public policy telecommunications outcomes be reformed to facilitate the competitive supply of universal service and other public policy telecommunications outcomes—

particularly in the context of the National Broadband Network. Unfortunately, the particular reform model proposed is deeply flawed for several reasons. Firstly, these reforms purport to introduce competition so that rather than Telstra automatically being the universal service provider:

... the government will contract with service providers for the supply of these important services.

In fact, this whole arrangement is a sham. The government has already concluded a contract with Telstra—a contract which lasts for 20 years. Far from being a competitive process, as is claimed, the government is simply dressing up an existing contract—a contract which was struck as part of a cosy deal negotiated in secret. Such an approach is all too common from this government—for example, its deal with the big miners in the context of the mining tax.

Secondly, the real purpose of these amendments is to hand another bucket of taxpayers' money to Telstra as part of getting it to cooperate with the NBN. Labor desperately need that cooperation, because if Telstra were instead to compete with the National Broadband Network, the already fragile business case for the NBN would be in complete disarray. The new USO bill therefore sweetens the arrangements that Telstra receives to the tune of a net present value of $700 million, according to Telstra's own estimate.

What is it that taxpayers are getting in exchange and what is it that Telstra is going to have to do differently? To start with, you need to understand that in delivering the universal service obligation today Telstra receives around $55 million a year from its competitors. Under the new 20-year contract with Telstra signed by Minister Conroy, Minister for Broadband, Communications and the Digital Economy, it will receive $290 million to deliver the universal service obligation and handle emergency services calls. After a couple of transitional years, the government will be tipping $100 million of taxpayers' money into the pot every year. The shortfall, $190 million a year, will be divided up amongst the industry based on market shares—the same mechanism used in today's deeply flawed USO arrangements.

It is true therefore that the amount Telstra pays into the industry pot will increase but that will be greatly outweighed by the much larger amount it now receives. Telstra's net position will therefore improve sharply. On my estimation, it will get over $100 million a year more to do exactly the same things it does today. This is a terrible deal for taxpayers. We will get not one jot more than we get today—namely, a commitment to provide a standard voice service, not a broadband service, to any Australian who wants it at prices as set out in the price cap rules.

Thirdly, far from advancing the position in terms of the service the consumer will receive, it actually goes backwards. Today, there is very little risk or uncertainty in receiving the standard telephone service—the basic voice service—over your existing copper wiring. Tomorrow, as is clear from the explanatory memorandum, there will be significant risks when the copper is turned off and the standard telephone service must be delivered over the NBN fibre to the customer's home. This is why the bill makes provision for $15 million a year for voice only migration, which we are told will fund 'migration assistance and basic rewiring tasks'.

Around one-third of homes take a voice only service on the copper network. Extraordinarily, this vastly expensive new National Broadband Network will in fact increase the risks for customers who only want a voice telephone service and, even more extraordinary, the government is proposing to spend even more taxpayers' money to mitigate a risk that its own policy has created.

Fourthly, this government could not resist creating yet another bureaucratic entity, the Telecommunications Universal Service Management Agency, TUSMA, with a CEO and commissioners, and the capacity to employ staff and retain consultants. Is there any suggestion in the bill that corresponding savings will be obtained from the Australian Communications and Media Authority? What a surprise: under this profligate and irresponsible government there is no suggestion that offsetting savings will be obtained.

Fifthly, these arrangements are part of a grubby and anticompetitive deal in which Telstra is being paid off with billions of dollars of taxpayers' money, and a substantial component of the pay-off, as we have seen, is that Telstra is being relieved of its current USO expenditures. Very concerningly, these arrangement are not competitively neutral but deliver a huge free kick to Telstra compared to its competitors. While it is true that Telstra faces an increase in its own USO levy contribution, almost the entire funding flows back to Telstra and it then gets the government money on top. By contrast, the rest of the industry faces a significant increase in USO contributions after 2014. Telstra has had the benefit of behind closed doors negotiations with the government about this deal. No other industry players have had that opportunity. This is far from meeting the standard of an open, transparent and competitive process. The third thing I want to mention is that there would be materially better ways of approaching this issue if the government were serious about reforming the universal service obligation arrangements rather than simply using this as a sham and a device to shovel more taxpayers' money to Telstra—and get absolutely nothing in return. I do not have a concluded view as to which would be the best approach, but it seems to me there are at least a couple of possibilities. One would be to simply leave the present arrangements in place and leave Telstra as the universal service provider. In practical terms, it will remain by far the dominant provider for much of the next decade. At the present rate, the vast majority of Australians will be connected to Telstra's copper network for many years to come. Even if the NBN ever gets built out to large parts of the country, Telstra is likely to remain the dominant retail provider.

The key reason for the changes in the package of legislation before the House today is a means of shovelling more taxpayers' money to Telstra. Why therefore do we need to have this elaborate and farcical structure of purported contracting-out arrangements—arrangements which will not come into force for 20 years at least? One of the significant benefits of this approach would be to avoid a cumbersome and expensive new bureaucracy and also avoid a further anticompetitive increase in the burden on Telstra's competitors.

Another approach which might be taken—and I do not necessarily advocate this but raise it to make the point that there are other possibilities—would be to divide the USO into two components. The first would be the obligation to provide the physical connection, which would be borne by NBN Co. Given that NBN Co. is incurring massive expenditure to connect homes around Australia this would not be an increased impost. The second would be the obligation to provide a retail service to a person who has a physical connection. That obligation could logically fall on whichever retail provider has the largest market share in a particular geography.

It is difficult for us to do much from opposition to improve the world, but we have put forward two amendments which are sensible. Nobody should take the view that on this side of the House we regard this legislation as effective pro-competitive reform or sensible management. It is not; it is a sham which does not improve the universal service obligation arrangements.