Competitors clueless on USO: Telstra

Telstra has rejected claims by its competitors that it is milking universal service obligation (USO) payments for extra cash.

Under universal service obligation legislation, currently being reviewed by parliament, Telstra will keep its copper network in place for the 7 per cent of Australia not covered by the fibre roll-out of the National Broadband Network and will provide a minimum voice service as it has for years. For this, Telstra will be paid $50 million in the first two years, and $100 million each year after for a period of 20 years by the government. Should costs for this service exceed this, the telecommunications industry will be required to pay a levy to make up the difference.

Optus and Macquarie Telecom have been particularly vocal in their opposition to having to pay this USO levy, as they see it as effectively having to pay Telstra to compete with it, and say the telco vastly overestimates the cost for providing USO services over its copper network today.

At a senate hearing yesterday, James Shaw, Telstra's director of government relations rejected these claims.

"The competitors, I have to say, don't pay the invoices that we pay, so we do know the costs involved in providing services to remote and regional Australia," he said,

According to Yolanda Chorazyczewski, Telstra's group regulatory manager, the last 7 per cent was particularly expensive for Telstra to reach.

"It is no coincidence that the NBN roll-out stops at 93 per cent. It's that last 7 per cent that is uneconomic for the NBN to roll out, well it's uneconomic for any infrastructure to be rolled out in those areas, and it is very costly to provide any other sort of infrastructure."

On the levy, Shaw said Telstra itself pays 65 per cent of the levy — effectively to itself — and noted that parts of the USO have previously been open up to competition and none of Telstra's competitors ever sought to take these on for the government.

He said the costs were purely about maintaining the copper, which becomes more expensive in regional and rural Australia.

"It's a large geographic area of Australia, with long copper runs, small population base, so the number of users on a length of copper can be quite small. So your unit cost can become substantially larger than putting a couple of kilometres of copper in a suburban area to serve thousands of customers," he said, adding that Telstra also had to maintain thousands of exchanges in the last 7 per cent.

"Which we have to keep powered up, we have to keep monitoring, so it is quite an extensive task. It takes time, money and manpower."

Shaw said that negotiations with the government had been "robust" and that the value for the USO was adequate within the whole NBN package with the government. Daryl Quinlivan, deputy secretary for the infrastructure group within the Department of Broadband, Communications and the Digital Economy, said that the department had assurances from economists commissioned during the negotiations that the value of $550 million was in the mid-range of the costs associated with providing USO.

"We've seen estimates of the cost of delivery of the USO. Anything from zero ... anywhere up to $1.8 billion. We were quite reassured that the number we eventually struck with Telstra was a midpoint," he said. "The negotiations with Telstra were very difficult, whether there is a margin in there for Telstra, I simply do not know. Telstra didn't tell us."

And given Telstra pays 65 per cent of the levy, Quinlivan said the telco had an incentive to keep costs down.

"There is a reasonable presumption ... that the operating costs of this part of the network will increase over time because it has very long [copper] lengths, it is the most hostile parts of the country. They'll be maintaining it in its current operating condition," he said. "Telstra has an incentive to minimise costs and if possible, move out of this part of the business in the medium term."

There were clauses in the 20-year agreement for Telstra to stop providing the copper network if it becomes apparent that after the NBN roll-out that it is no longer needed.

"The government's undertaking is to provide continuity of the copper services during the period of the NBN roll-out and beyond, and if it becomes clear at some point during that 20 years that the demand is no longer there for use and retention of the copper network, then there are facilities in the contract for terminating it," he said.

Quinlivan added that although the industry would ideally like to see that contract ended as soon as possible, rural interests wanted more certainty of services being offered, which is why the government opted for a 20-year contract.