The Government's $300 million commitment to roll out fast broadband services to rural customers and schools will see Telecom effectively bearing most of the cost - and customers won't end up footing the bill.

Communications Minister Steven Joyce yesterday unveiled his finalised Rural Broadband Initiative - a $300 million, six-year plan which aims to deliver high-speed broadband connections to 97 per cent of rural households and 97 per cent of schools throughout the country.

But consumers will not be hit by price increases - Telecom is prevented by law from raising basic phone service prices to recoup lost revenue under the new scheme.

The Government will provide $48 million in direct funding but $252 million or $42 million a year will come from a new Telecommunications Development Levy introduced in a reform of the controversial Telecom Services Obligation or TSO.

The TSO, calculated annually by the Commerce Commission, estimated how much it cost Telecom to provide telephone services to commercially non-viable - largely rural - customers and how much of that its rivals should pay Telecom as their share.

But Cabinet decided on Monday that the method used to calculate Telecom's costs is not accurate and the net cost is essentially zero once the benefits of operating the wider basic telephone network are included.

Instead, the telecommunications industry will from next year be required to contribute a total of $50 million a year into the levy fund.

While it will primarily fund the Rural Broadband Initiative some may also go toward improving the 111 emergency network and other initiatives.

With the most recent annual TSO set by the Commerce Commission at $69.7 million, Mr Joyce said the new levy represented a net reduction in what the industry was paying although it was Telecom's rivals that would enjoy the benefit.

"The reforms will ensure that when compensation to Telecom for supplying local telephone service is calculated, the full benefits and costs of being the nationwide supplier of the TSO services are taken into account."

Telecom yesterday said it expected the reforms would cut about $56 million a year from its operating profit.

Its shares fell 4c to $2.17, but Mr Joyce said yesterday's announcement had been well signalled last September and most of the impact had been priced into the company's market value.

Ernie Newman of the Telecommunications Users Association - a long-time critic of the TSO - said yesterday's announcement was a welcome change.

"There have been endless debates over the years about the way of calculating the thing and it's a huge turnaround that the Government has now reached the conclusion that in fact it doesn't cost anything at all in net terms because the benefits actually outweigh the costs.

"There have been many people among Telecom's competitors that have been arguing this vehemently for many years and it seems there's some vindication of that now."

Vodafone - which yesterday said it was too early to tell how much less it would pay under the levy - is currently challenging most of the historic TSO calculations that have seen it pay up to $18.5 million a year to Telecom.

However, despite his Government's revised view on how much it cost Telecom to provide rural services, Mr Joyce said he had "no interest in relitigating the past".

Work is scheduled to begin on new rural infrastructure next year.

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* The TSO is a deal introduced before Telecom's 1990 privatisation to retain affordable access to residential phone services.

* Originally called the Kiwi Share, it was renamed in 2001.

* In 2007, the Government asked for industry feedback on a review of the TSO.

* Last year the Commerce Commission put the draft cost of the TSO for the 2008/09 year at $69.7 million and proposed $46.3 million of the cost should fall on Telecom, $18.2 million to Vodafone and $4.5 million to TelstraClear with the balance shared among other telcos.

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