UNIVERSAL SERVICE SUBSIDIES (2001-03 CONTESTABLE AREAS) DETERMINATION (NO. 1) 2001 (AMENDMENT NO. 1 OF 2001)

STATEMENT OF REASONS FOR DIVERGING FROM THE ADVICE OF THE AUSTRALIAN COMMUNICATIONS AUTHORITY

Issued by the authority of the Minister for Communications,

Information Technology and the Arts.

The Universal Service Subsidies (2001-03 Contestable Areas) Determination (No. 1) 2001 (Amendment No. 1 of 2001) varies the Universal Service Subsidies (2001-03 Contestable Areas) Determination (No. 1) 2001 which was made by the Minister on
11 April 2001 and notified in the Gazette on 26 April 2001.

Sections 16 and 16B of the Telecommunications (Consumer Protection and Service Standards) Act 1999 (the Act) provide for the Minister to determine subsidies for the supply of services under the universal service obligation (USO) in a universal service area for up to three years in advance.  Section 16A of the Act requires the Minister to seek the advice of the Australian Communications Authority (ACA) prior to determining or varying USO subsidies for a universal service area.  Item 6A of Schedule 2 of the Telecommunications (Consumer Protection and Service Standards) Amendment Act (No. 2) 2000 provides that if, before 31 December 2000, the ACA has given advice relating to universal service subsidies to the Minister, the advice is taken to have been given to the Minister in accordance with s.16A.  Under s.16A of the Act the Minister must also provide a statement of reasons where the Minister does not make a determination in accordance with the advice of the ACA.

On 18 September, 19 October and 22 December 2000 the ACA provided advice to the Minister for Communications, Information Technology and the Arts on USO subsidies for the proposed universal service areas of the Extended Zones, the two proposed USO contestability pilot areas and the remaining standard or default area of Australia for 2000‑01 to 2002-03.  As well as recommending actual subsidies, the ACA's advice covered a number of other issues relevant to the level of subsidies, including the definition of the universal service areas.

The Universal Service Subsidies (2001-03 Contestable Areas) Determination (No. 1) 2001 (Amendment No. 1 of 2001) further draws on the advice of the ACA to set subsidy levels for the remaining 15 universal service areas in the New South Wales – Queensland pilot area, and makes some adjustments to the primary instrument. 

Pursuant to s.16A of the Act, this document provides a statement of reasons for all points of divergence from the ACA's advice.  The statement only covers matters that are the subject of this variation, not all matters covered in the ACA’s advice.

Subsidies for remaining New South Wales-Queensland Universal Service Areas

Previously the Government deferred activating contestability in 15 local government areas in the New South Wales-Queensland pilot area.  The ACA’s advice was that universal service areas in this region should be based on community groupings of local government areas with subsidy values calculated by averaging modeled subsidies over all households in the non built-up area of each community grouping.  The Government did not adopt this advice because it considered the size of the community groupings may discourage competitive entry.  In addition, averaging subsidies over the community grouping would have resulted in available subsidies being spread over a much larger number of services than were identified as loss-making by the ACA's modeling, giving rise to a significant possibility for market distortions. 

In contrast, the approach the Government has adopted is to identify census collection districts (CCDs) [1] which are more likely to contain a greater proportion of loss-making services and group these together until the non built-up households in the grouping aligns with the ACA’s estimated number of modeled allocated loss-making services.  The selection of CCDs was generally based on the following criteria:

·        the inclusion of CCDs with a lower household density;

·        the inclusion of CCDs that correspond with high-cost regions;

·        the exclusion of CCDs close to significant population centers; and

·        the ability to form contiguous areas.

Each group of CCDs forms a universal service area.  The per service subsidies for each universal service area are calculated by dividing the total modeled subsidy for the area by all non built-up households within the universal service area.

This results in USO subsidies being focussed on loss-making services, and subsidy levels which are more in line with the ACA’s modeled estimates.  The resultant subsidies are more likely to be at the levels required to cover costs, making per service subsidy levels and competitive entry more attractive.  The remaining unsubsidised areas are included in the default area: meaning that consumers will still receive full USO coverage through the primary universal service provider. 

Adjustment of lump sums where certain subsidies reduced to modeled levels

The previous Statement of Reasons noted that where the number of services on the ground was less than the number of model allocated services, the ACA had recommended subsidies that were above the modeled outcomes.  In these circumstances the ACA’s recommended subsidies were reduced to the levels estimated by the model as being the appropriate subsidy levels, to prevent windfall benefits for universal service providers and to contain the overall USO subsidy.  Due to an oversight in the drafting of the instrument, a corresponding change was not made to the lump sum subsidies.  Left unaltered this would result in the primary universal service provider being overpaid if paid the lump sum amount.  This oversight is corrected by adjusting the amounts for the lump sum subsidies. 

Capping of aggregated subsidies where no competing providers present

Where there are no competing universal service providers for a claim period, the Universal Service Subsidies (2001-03 Contestable Areas) Determination (No. 1) 2001 provides the primary universal service provider with the option of making either an aggregate subsidy claim or a detailed per service subsidy claim.  The ability to make an aggregate subsidy claim was recommended by the ACA to simplify claim procedures and enable the primary universal service provider to minimise administrative costs. 

Given the pilot nature of the contestability trials, there is a possible risk of a blow-out in subsidies due to an underestimate of the number of services in operation.  To mitigate this risk, the primary universal service provider is required to make an aggregate claim where there are no competing universal service providers for a claim period: still allowing it to make administrative savings, but limiting its claim to the aggregate subsidy calculated by the ACA.  Where there is competition, all universal service providers will claim on a per service basis, with no limit being placed on the total amount of subsidy claims.  This provides certainty for all universal service providers and is in line with the advice of the ACA.