Consumers to suffer in Kiwi Share wrangle

By PETER GRIFFIN telecoms writer

The country's telecommunications industry faces the prospect of contributing to Telecom's Kiwi Share losses, but competitors say their own prices will have to rise as a result.

The Commerce Commission yesterday ended a four-day conference in Wellington on the so-called TSO (telecommunications service obligations), which are built into the Telecommunications Act, and allow for any losses faced by Telecom in providing national call services to be shared with competitors.

It is a contentious issue that the better-financed telcos are taking seriously, knowing that millions of dollars are riding on the decisions the commission makes in setting a figure for the TSO.

International experts and high-profile consultants have contributed to the conference, which has largely involved Telecom, TelstraClear, Vodafone, Walker Wireless and the Telecommunications Users Association.

Telecom even produced 84-year-old American economist Professor Alfred Kahn, who was patched in via a video link.

Central to the argument is the loss Telecom claims it makes on providing call services to 390,000 customers nationwide - a loss it says equates to $180 million.

Under the act, Telecom's loss, which is calculated by the commission, will be divided among the industry based on market share of revenue.

As the dominant player, Telecom will wear up to 80 per cent of the cost. TelstraClear estimates its market share accounts for between 10 and 12 per cent, with the balance made up by Vodafone and smaller players such as WorldxChange and Callplus.

TelstraClear's industry and regulatory affairs manager, Grant Forsyth, said the extra costs were unlikely to be absorbed, being passed on to consumers. "The tax arising from contributing to Telecom's cost of supplying the KSO [Kiwi Share obligation] is likely to mean prices rise for customers of both ourselves and Telecom."

Telecom would pick up a "windfall profit" from contributions but would have no incentive to keep its prices level as competitors increased theirs to claw back contributions, he said.

Telecom's general manager for Government relations, Bruce Parkes, said that inevitably, "prices would reflect the costs".

But he rejected TelstraClear's claims that Telecom already recoups its Kiwi Share losses through highly priced interconnection agreements.

"There's never been any Kiwi Share component in our interconnect. Telecom considers it a contribution to our fixed and common costs," Parkes said.

Telecom claims the increase in use of flat-rate dial-up internet accounts means users are tying up phone lines longer, but not paying any more because local access calls are unmetered. The high costs in servicing and maintaining large parts of the network in rural areas also contributed to costs.

TelstraClear claims Telecom would in effect get paid twice when competitors start contributing for a period backdated to when the act was passed in December.

"Over that period we've been paying an interconnect presumably in which there is a contribution to the KSO. For this period Telecom would get a double dip," Forsyth said.

It is an argument that has been furiously debated across the Tasman, says Paul Fletcher, head of regulatory affairs at second-ranked telco Optus.

Australia has a system similar to the TSO known as the USO (universal service obligations) which require all telcos to contribute.

Fletcher said making telcos contribute to the USO based on revenue rather than profit made was "completely ludicrous".

"It is like Virgin Blue, the No 2 airline in Australia, having to pay Qantas to get into the game."

Telstra has claimed its loss on reaching unprofitable customers is A$1.8 billion ($2.07 billion). The Government regulator, the Australian Communications Authority, puts the cost at A$550 million.

Last October, the USO was set for the next three years at A$240 million per annum.

Of that, all industry players chip in relative to their market share.

Telstra pays the bulk while Optus pays over A$40 million, or 16 per cent. Telecom-owned AAPT's contribution is believed to be in the low millions.

Parkes said Telstra enjoyed a further contribution in the form of an "access deficit" charge of .7c per minute levied on customers Telstra interconnects with.

Fletcher said moves to relax restrictions on Telstra's line rental charges would see Telstra able to increase its charges over the next five years while cost recovery through interconnect gradually reduced to zero.

But TelstraClear argues that competing telcos in Australia enjoy better residential wholesaling that the retail cost minus 2 per cent they are faced with here.

"In other jurisdictions the discount is usually 17 to 25 per cent," Forsyth said. "Telecom in Australia, through AAPT, enjoys a discount of 26.6 per cent in residential."

Telecom must present a revised calculation of its Kiwi Share losses to the commission by the end of September. A draft decision on the TSO is expected before Christmas.