It's time to call Telecom's bluff on Kiwi Share

By CHRIS BARTON

It's hard not to see Telecom's decision last week to raise prices on new phone connections as a hissy fit. Smarting from its failure to win the tender to supply broadband to Southland and stung again by the Commerce Commission's ruling to lower interconnect payments, Telecom' s tantrum is designed to embarrass the Government.

So far it's working. Minister of Communications Paul Swain has scuttled off to the Crown Law Office to ask, "Can Telecom do this?"

If the minister doesn't know the answer already, he should. Telecom can and will do whatever it likes - one of the trappings of monopoly power.

But the minister should be embarrassed because it was he who secretly renegotiated the Kiwi Share Obligation to its current form in December last year - and forgot to include proper universal service provisions, especially for new customers.

The deal, described by some as a Faustian pact, was designed to improve the appalling line speeds and quality of many rural customers and to clarify whether internet calls were included under the original Kiwi Share negotiated when the Government sold Telecom in 1989.

But in his hurry to get Telecom to agree that 95 per cent of all existing residential lines should provide a paltry 14.4 Kbps internet connect speed, he forgot to include the basics - namely, to ensure the provision of a basic telephone service to all people on an equitable basis, wherever they reside or carry on business.

Instead it was left wide open for Telecom to discriminate against customers by their location. In doing so, Telecom has effectively removed itself from winning any of the Probe regional tenders to extend broadband communications to the regions.

The advanced tenders such as Southland, Northland and Wairarapa have all stipulated something called distance independent pricing - "service connection fees and fault repair costs shall be distance independent to subscribers."

And Probe project director Tony Van Horik confirmed that the principle was to make broadband "affordable for all customers" and not to disadvantage people for their location.

When you think about it, in a civilised connected society the ability for all citizens to communicate with one another via a phone system is almost a basic human right - not just for emergency communications, but also to meet social needs. It makes good business sense, too.

Telecommunications 101 tells you the more people there are connected, the more people you can call and the more people can call you - and the more revenue a telco can make.

So what on earth is Telecom's game? The ploy is to highlight the cost of adding a new connection to help Telecom's argument about Kiwi Share losses, which, under the new Telecommunications Act, it can recoup in part from its competitors.

Telecom reckons the losses from having unprofitable - apparently mainly rural - customers on its network amounts to $408 million a year. Most people think this figure is terribly inflated and even Telecom admits if it used a cost of capital of 8.2 per cent rather than 13.2 per cent its Kiwi Share loss would be only $210 million.

Either way the telecommunications commissioner is trying to work out what the real number is. But because new connections aren't included in the Kiwi Share Obligation, Telecom is able charge whatever it likes - and because it has a near monopoly on residential lines, it can.

Telecom argues that the costs of a new connection are not just in the engineer's time to hook everything up, but also include the capital costs of extending the network to ensure it has the capacity to cope with the extra connection. Costs are more in rural areas because the distances are greater and fewer customers share the cost of the asset.

Fair enough. But it's not the full story. First, rural customers in hard-to-reach places have always paid much more for new connections - usually about a third of the cost of the installation.

Second, when a new line to an area is installed, it has capacity for connecting others moving into the area, which means the cost of extending the network is shared over time across multiple users.

But rather than spread costs and average them over time Telecom is making each rural user pay the marginal cost of connection.

Let's also not forget every new connection also delivers revenue - a minimum of $38.05 a month rental plus $2.24 a month maintenance, not to mention tolls and other services.

While it's possible some connections are not profitable on this level of revenue, it does depend how you do the numbers.

But Telecom's moves do highlight serious shortcomings in the Kiwi Share Obligation and the company's unwillingness to accept any regulatory controls on its monopoly power. They show also how Telecom, in direct negotiation, can so easily dupe ministers and officials.

What's needed is a complete overhaul - properly using the the telecommunications service obligations of the new act - to ensure a basic phone service for all.

But the Government should go a step further by calling Telecom's bluff - and allow it it contract out of the Kiwi Share Obligation on a regional basis. Judging by the level of activity in the regions, plenty of competitors are dying to take over Telecom's monoploy on supply.

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