Commerce watchdog may have to redo its sums on telco fees

Vodafone's Tom Chignell believes all service obligations may have to be reviewed. Photo / Dean Purcell

The Commerce Commission may be forced to recalculate two years of fees paid to Telecom by its rivals under a decision released by the High Court yesterday.

A ruling by Justice Helen Winkelmann upheld complaints by Vodafone about the calculation of Telecommunication Service Obligations (TSO) costs it and other telcos pay Telecom to run basic phone services to between 50,000 and 60,000 hard-to-reach customers.

The Commerce Commission ascertained Vodafone should pay close to $30 million for its share of the TSO costs for the period from mid-2004 to mid-2006.

Other telcos including TelstraClear and Orcon would need to chip in a further$8.6 million over the same two-yearperiod.

Justice Winkelmann has upheld Vodafone's objections in a High Court judgment released yesterday, saying: "I am satisfied that the commission erred in law in its determination of net cost because by ceasing to introduce new technology into the modelled network, it ceased to calculate the unavoidable costs of an efficient service provider."

The Commerce Commission is not commenting until it has studied the judgment and has until May 3 toappeal.

Vodafone has long argued that the model to calculate TSO costs should take into account new mobile technology.

Vodafone's general manager of corporate affairs, Tom Chignell, said the decision could see a review of all TSO determinations.

In a separate judgment, also released yesterday, Justice Winkelmann has dismissed a challenge by Telecom to the TSO for the same period.

Telecom asserted the rates of return set by the commission in its TSO decisions were below what any reasonable investor could accept for large-scale infrastructure investments.

Telecom group general counsel Tristan Gilbertson said the company was surprised at the decision and was likely to appeal.

Gilbertson said there appeared to be inconsistencies between the latest decision and an earlier Court of Appeal ruling against Vodafone, which Vodafone is appealing against.

He said there was some merit in the Supreme Court hearing all the TSO matters at the same time.

Vodafone is in the process of challenging Commerce Commission calculations for a further three years: 2003/2004, 2006/2007 and 2007/2008.

A 2004 challenge to one of its first TSO payments was thrown out by the Court of Appeal after an embarrassing legal mix-up saw it fail to lodge an appeal within the 20-working-day appeal window.

A further calculation for the 2008/2009 year is still in draft form.

Telecom is also appealing against the 2006/2007 and 2007/2008 TSO calculations.

Both Vodafone and Telecom said they were open to working with each other and the commission to reach a commercial agreement.

Last month the Government unveiled its replacement for the TSO - the Telecommunications Development Levy - which will see it provide $48 million in direct funding but $252 million or $42 million a year would come from the industry to fund improvements to rural broadband. Under the new model, Telecom would meet the cost of providing basic phone services after the Cabinet decided Telecom's net costs were essentially zero once the benefits of operating the wider basic telephone network are included.

Telecom estimates the changes would have an impact on earnings of $56 million a year.

Telecom shares closed down 2c yesterday at $2.22.

THE TSO

Telecommunications Service Obligations:

* Created by the Telecommunications Act of 2001, updating the old Kiwi Share Obligation.
* It is a contract between the Crown and Telecom, created when Telecom was privatised in 1990.
* Under the contract, Telecom must provide telephone services, free local calling and low-speed internet access throughout New Zealand.
* The 2001 act compensates Telecom for the cost of its duty to service unprofitable customers by levying other telcos.
* The Government plans to replace the TSO with $42 million a year Telecommunications Development Levy to fund improvements to rural broadband.
* Under the new plan Telecom will no longer be reimbursed for its present obligations.