Productivity Commission draft report calls time on USO as NBN looms

The Productivity Commission draft report [PDF] into the telecommunications universal service obligation (USO) has recommended the days of the obligation be numbered.

"The Australian government should phase out the existing telecommunications universal service obligation as soon as practicable," the Commission recommended.

The USO mandates Telstra as the fixed-line phone service provider of last resort, which includes standard phone services and payphones, and has cost AU$3 billion in net present value terms over its 20-year life.

"In a digital age, the voice-based telecommunications universal service obligation ... is anachronistic and needs to change," the report said.

The report said the rollout of the National Broadband Network across Australia would allow a baseline service level for broadband, and thus voice services over IP, to be established across all premises, once the network is completed.

"To the extent that there are any remaining availability, accessibility, or affordability gaps once the NBN rollout is complete, current trends and existing policy settings suggest that these are likely to be small and concentrated, and amenable to specific social programs rather than large scale government interventions such as the telecommunications USO," the Commission said.

The report said that in its current 20-year contract with Telstra, the Australian government did not demand any accountability from the nation's biggest telco.

"Telstra is not required to report on the number of non-commercial services or on the costs of any telephone service it supplies," the report said. "Effectively every fixed-line customer of Telstra is treated as a telecommunications USO customer, irrespective of whether the service is commercial or not."

The end result is the Commission estimates the USO could imply an annual subsidy to the incumbent telco of "anywhere between AU$250 and AU$2,800" for each USO service, and an annual payment of between AU$2,500 and AU$50,000 per payphone.

The Commission recommended the Australian government immediately begin work to change, with a view to abolition, the clauses in the USO agreements related to standard telephone service and payphones. In the case of payphones, it is recommend the government aim for early termination of payphone obligations and make the necessary legislation changes needed.

With the completion of the NBN slated for sometime in the next half-decade, the Productivity Commission said it makes the telephone services portion of the USO redundant for those within the NBN footprint.

"NBN infrastructure will be more than adequate to meet a baseline level of broadband (including voice) service availability for the vast majority of premises across Australia -- specifically for at least the 97 percent of premises that fall within the NBN's fixed-line and fixed wireless footprints," the report said.

However the Commission identified approximately 90,000 premises that fall under NBN's Sky Muster footprint and are without terrestrial mobile phone services, and would therefore receive a substandard voice service over satellite -- the Commission did not make a recommendation on how to resolve the situation and instead called for alternative suggestions.

On the funding side, the report said the government should fund its recommendations from general revenue, and once the NBN is rolled out, the funding needed to meet any obligations would decrease.

"The Commission considers that, in its current form and with a 20-year term, the telecommunications USO Agreement presents a fundamental roadblock to the implementation of the Commission's recommendations," the report said.

In response to the draft report, Telstra said it would take time to consider the implications of the recommendations.

"Telstra supports many of the points raised by the Commission and we remain supportive of changes to the USO if they improve the experience for customers in delivering a universal service. We support the Commission's view that the government should consider whether the ongoing payphone obligation is delivering the best value to Australian consumers and communities," a Telstra spokesperson said.

"A transition to NBN becoming the wholesale Universal Service Provider requires them to be operating a truly national network capable of delivering a good quality voice service on demand, something that would not be possible at the moment.

"We need to make sure that we fully understand the impacts this could have on customers before taking any action that could see remote customers left without a reliable service."

In October, Telstra group director of Corporate Affairs Tony Warren said the telecommunications provider sees "absolutely no chance" that the government will remove the USO.

"While it is easy to ... pontificate about alternative network solutions and contestability, the reality is that many people in the bush still want guaranteed access to a fixed landline," Warren said.

"With the composition of the current federal Parliament, I see absolutely no chance at all that the government will remove the USO any time soon."

Vodafone has leapt on the report, and labelled its findings as damning.

"Its report demonstrates a thorough understanding of the issues, and recommends a clear, sensible path forward to fundamentally reform the USO for the digital age," Vodafone chief strategy officer Dan Lloyd said in a statement.

"This report is a damning indictment of the USO model which demands immediate action. We urge the government to follow the Commission's recommendation to immediately begin negotiations with Telstra to amend and end the standard telephone and payphone modules of the USO."

The Competitive Carriers Coalition (CCC), a group of Australia's non-dominant telcos, called for the USO to be ditched immediately and said it was proof the complaints of all Telstra competitors over the past 20 years were justified.

"Basically, Telstra -- the most profitable telco in develop [sic] world -- gets a big, fat cheque from competitors every year, no questions asked, and no one can account for either how it is spent or why it is needed," CCC chairman Matt Healy said.

"Competitors and consumers have a right to be disgusted they continue to fund a program so irresponsibly designed and managed that no government could possibly defend it.

"The USO agreement is clearly a rort that the Commission estimates will line Telstra's pocket to the tune of AU$3 billion in net present value terms up to 2032, for no measurable benefit."

Last week, the government announced the AU$60 million second round of its mobile blackspot program, which saw Optus and Telstra take home most of the government's money. This round followed on from the Telstra and Vodafone-exclusive AU$185 million first round.

The Commission said the federal government should change the program to target location that would benefit consumers, revise infrastructure sharing requirements, and prioritise areas based on community suggestions rather than asking members of parliament for locations.

Submissions on the Productivity Commission's draft report are open until January 20, with the final report set to be handed to government by April 28, 2017.