Govt spies early exit from Telstra contract

James Hutchinson | Feb 3, 2012 12:30 PM
Copper costs hinge on speed, quality of NBN migration.

The Department of Broadband, Communications and the Digital Economy has revealed exit clauses in a 20-year, $2 billion contract with Telstra that can be enacted if the incumbent's copper network is abandoned faster than expected.

The contract, signed as part of definitive agreements with NBN Co, Telstra and the Government, obligate Telstra to provide basic telephony services to the seven percent of Australian premises not covered by the planned fibre-to-the-home network for the next 20 years.

However, the department revealed in a Senate inquiry yesterday that the Government could pull out sooner, should remote NBN users migrate away from Telstra-supplied services.

"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," DBCDE deputy secretary of infrastructure Daryl Quinlivan said.

"Obviously the industry would like to see that happen as soon as possible but the rural interests and representatives that we've dealt with have been keen to have as long a period of certainty as possible, rather than a shorter period."

The period included in the contract appears to have been negotiated between the Government and Telstra as a "safety net" for migration to the NBN, and a middle ground between industry and consumer concerns.

An early exit could please the telecommunications industry, which is expected to tip in $230 million a year in levies to Telstra as part of the Government's contract.

Though worth $2 billion in net profit value to Telstra over its life, industry would be up for $4.6 billion over the life of the contract for the services and continued maintenance of the degraded copper network.

A DBCDE spokesman confirmed the exit clauses but would not clarify in what circumstances the Government could cleanly escape from the contract before the 20-year period is complete.

A final decision on whether to pull the pin on the contract, or portions of it, likely won't come before the first official review of universal services in 2022, seven years after final fixed wireless and satellite services are expected to be in place under the NBN.

A key concern in the transition away from the copper network has been the speed at which the seven percent of Australian premises outside the fibre footprint migrate to the NBN for voice services.

While it is expected voice over internet protocol will become prevalent among users on the fibre and fixed wireless networks, the three percent most rural consumers on a satellite service are likely to suffer latency and jitter for voice services, despite significant speed boosts over current technology.

Telstra is at least partly banking on satellite users' reluctance to switch in order to see the full 20-year term of its contract with the Government realised.

"I think it's inevitable that some people will want to stay on the copper network," Telstra's government relations director James Shaw said.

"Our experience in providing voice on satellite suggests that if you had a choice of voice on satellite or voice on copper, you'd stay on copper."

Telstra has moved to supplying its own fixed wireless solution, based on its Next G network, to fulfill its USO obligations in new developments and some remote areas where it cannot or will not repair the copper network there.

Shaw said the telco would continue to explore alternative technologies for delivering the service other than on copper.

USO a Telstra cash cow?

Telstra's rivals continued to assert that increased industry levies to fund the provision of basic telephony services will only line Telstra's pockets further.

In separate submissions - but appearing together at an in-person hearing before the Senate committee - Optus and Macquarie Telecom argued Telstra would receive higher payments without its cost base changing significantly.

"The fact that there is a substantial increase in funding but no increase in service levels means that Telstra will receive a significant windfall gain," Optus said in its submission.

Macquarie characterised the levy as "effectively a tax on competition which discourages sector participation and investment".

Telstra's Shaw would not confirm when pressed by senators whether the negotiated levy included a profit margin on top of required costs to fulfil the levy.

Likewise, the department's Quinlivan said he was not aware of any profit margin built into the $290 million total that Telstra will receive annually to maintain the USO, but took solace in the independent economic analysis conducted during negotiations [pdf].

"We did our best to negotiate a minimum price," he said.