Rival $14m richer after watchdog ruling

By PETER GRIFFIN

After a landmark decision from the Commerce Commission yesterday Telecom will pay arch-rival TelstraClear $14 million, but consumers will not be so lucky.

Handing down his first major decision since taking up the role of telecommunications commissioner, Douglas Webb slashed interconnect prices - what Telecom and TelstraClear charge to access each others' networks - from 2.63c a minute to 1.13c a minute.

The ruling could cut TelstraClear's interconnect costs by as much as $30 million a year, but the company is coy about whether those savings will flow on to customers.

Hailing the decision as the "end of monopoly prices" in the sector, TelstraClear chief executive Rosemary Howard said lower interconnect costs would enable TelstraClear "as a challenger to be more efficient", but gave no hint retail prices would drop.

Having reported a loss of $107 million in the six months to June 30 on revenue of $305.6 million, TelstraClear is more likely to use cost savings to improve its bottom line. The company hopes to turn a profit by the end of 2004.

In a commercial deal earlier in the year, Telecom and TelstraClear agreed to backdate payments pending the commissioner's decision to June 1. Telecom says it is happy to repay the difference between the rate TelstraClear was paying and the new rate.

Chief operating officer Simon Moutter said the $14 million figure was "in the ball park" in terms of what Telecom believed it owed. The cash payment had already been allowed for in accounts.

Telecom says the negative impact of the ruling will equate to a revenue reduction of only $10 million to $12 million a year, despite the $14 million sum covering just five months.

The company had interconnect revenue of $112 million in the year to June 30, down from $145 million in the previous period.

Telecom yesterday took a battering in the sharemarket after issuing a profit forecast well below analysts' expectations. It has made noises about cutting investment in networks if future regulatory decisions do not go its way.

"This is leg one of a three-leg regulatory trifecta, the other two being wholesaling and the TSO contributions," said Moutter of the interconnect decision.

"But from the early signs, we feel the commissioner is overweighting short-term price considerations. That could have a significant impact on investment for us."

TelstraClear customer and tolls operator WorldxChange said it was unlikely to cut retail prices.

"I don't think you'll see from any of us any major price reductions, but WorldxChange will go from a zero margin overall environment to some profit that I can invest in my own network," said general manager of sales Cecil Alexander.

Sydney-based telecoms analyst Paul Budde said international experience had shown that better deals on interconnect did not usually translate into lower prices.

"What it provides is a better foundation for competitors to build a business model. One of the reasons most traditional telcos in New Zealand have either left the market or are insignificant in size is that the foundations for a viable business model didn't really exist," said Budde.

Although the interconnect decision is seen by many as the most powerful attack yet on Telecom's fixed-line monopoly, more significant decisions in the form of wholesale telecoms pricing and calculations of the Telecommunications Service Obligation (TSO) faced by the industry as a whole are still pending.

WorldxChange's Alexander fears any benefits from cheaper interconnect will be eaten up in TSO costs imposed next year, leaving Telecom's competitors no better off.

"For all the good news of this, the silver cloud may have a muddy lining."