Chris Barton: Telecom's elastic missing millions

The latest Commerce Commission draft ruling highlights just how dysfunctional things are in New Zealand's telecommunications family.

The ruling established that Telecom, in providing basic telecommunications services across 1.3 million residential lines, is suffering a loss of $73.45 million a year.

Yes a "loss" from the same company that reported net earnings of $498 million for the nine months ended March 31 this year. Telecom is not happy because it reckons the loss is much higher - $170 million by its latest most realistic estimate.

The competing telcos believe that the loss is much lower - about $40 million, according to TelstraClear. They are also not happy because the Telecommunications Act deems that the "cost" of this service obligation should be shared among Telecom's competitors according to their share of the total pool of telecommunications retail revenues.

For the six months to June last year, the pool was worth a staggering $1.88 billion. Telecom took the lion's share with $1.5 billion, which means it shoulders 80 per cent of the service requirement cost.

But that leaves a $14.7 million tab to be picked up - mainly by Vodafone and TelstraClear, but also by the minnow operators CallPlus, WorldxChange, ihug, Teamtalk, Compass and Equant. Vodafone, for example, contributes about 10 per cent, while CallPlus gives just under half a per cent and Equant chips in just 0.01 per cent.

Sounds fair enough. But the competing telcos say the cost is a tax on competition because for every dollar they earn, they have to pay some to Telecom.

On the face of it, this $14.7 million Government-sanctioned handout to Telecom seems reasonable. The service obligation is there to ensure everyone gets an acceptable telecommunications service, and since all carriers benefit from Telecom's national fixed-line coverage, they should pay their share.

Prod any telco long enough and it will usually agree that some sort of universal service obligation to meet social needs is necessary in a civilised country.

The main reason is to make sure people can call 111 in emergencies. But these days the right to own a telephone is almost like a basic human right - up there with freedom of speech and being presumed innocent until proven guilty.

To understand how this service obligation cost came about, we need to go back to 1990. That was when the Government sold Telecom to an Ameritech/Bell Atlantic/Fay Richwhite/Gibbs/Farmer syndicate for $4.25 billion ($1.81 a share). As part of the deal the Government held a "Kiwi Share" - essentially a contract to ensure a reasonable standard of phone service and to maintain existing untimed local calling areas.

Back then there was no arrangement for the cost of the Kiwi Share to be shared around competitors. The cost was something the buyers of Telecom had to wear - and one of the reasons they got the company so cheaply.

The idea of sharing the Kiwi Share cost with competitors came in December 2001, when the Telecommunications Act was passed. The change came after intense and prolonged lobbying by Telecom, which argued that the Kiwi Share did not cover dial-up internet access which had more than doubled the traffic on Telecom's network.

The latter point was true, but as the commission points out, more traffic does not really increase costs: "Unlike, for instance, a roading network, the components of a modern telephone network are not worn out by the traffic travelling along them. An increase in call traffic only imposes extra costs on a telephone network if the capacity of the network has to be increased to cope with the increased traffic."

The commission also points out that the extra capacity Telecom has added over the years since 1990 has not been substantial and probably did not have much to do with increased internet use. It also said much of Telecom's capital expenditure in recent years "would likely have occurred anyway as part of normal upgrading to replace old equipment, and to cope with population growth and increased voice calling".

Which would seem to indicate that the Government was well and truly duped by Telecom. The Herald has tried to find out under the Official Information Act exactly why the Government renegotiated the Kiwi Share, but crucial documents including Crown Law Office legal opinion and correspondence between Telecom, the Prime Minister and the Minster of Communications between August and October 2001 have been withheld.

Regardless of those secret machinations, the commission has done its complicated sums and come up with the $73.45 million number. Unlike politicians, Telecommunications Commissioner Douglas Webb has quickly become known as "Mr Incorruptible". His rulings are fastidiously detailed and meticulously by the book - so it's hard to see how Telecom or its competitors have much room to move.

Webb's complex modelling mathematics shows Telecom has about 51,000 "commercially non-viable customers" - just 4 per cent of Telecom's residential customer lines. These are in fact clusters of customers coming off the same feeder cabinet whose "standard residential line rental plus expected supplementary revenue" doesn't cover "the incremental economic costs" of providing basic telecommunications services by "an efficient service provider".

What has to happen now is for the actual location of the feeder cabinets of the uneconomic 51,000 to be revealed - assuming the mathematical model that arrived at this number can be related to the real world.

That way Telecom's competitors would have an opportunity to try to service those customers more cheaply and reduce Telecom's loss - and their contribution to pay for it. Better still, why not put the 51,000 out to competitive tender to see if the loss can be completely taken off Telecom's hands?

Sadly the Telecommunications Act does not allow for either possibility - just Webb's "efficient network" mathematics which will be remodelled as Telecom loses "a significant number of customers from its network to a competing operator". Hardly a great way to encourage competition.

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